What to Do About This Scary Stock Market

shockmonsterRecently I’ve been getting a lot more emails that go something like this:

Dear Mr. Money Mustache,

I’m a new reader and I’m interested in improving my money situation. Spending less, earning more and investing. But when I checked out your article on stock investing with Betterment, it looks like a terrible deal. You’ve pumped in $116,000 to that account over the last 16 months and yet the current value is only about 110 grand. You’ve lost almost six thousand dollars!

I think you picked a lemon – I think I’ll either find a financial adviser that can make me more money, or stick with my savings account. Half a percent is a lot better than losing six grand!

While these emails are always a little bit unfortunate (because it means I haven’t done a great job making my investing articles easy to find), I’m actually thankful for the drop in my account value. And the even larger number of dollars I’ve lost in the rest of my retirement savings sitting at Vanguard and other places. It’s not just six thousand dollars that has disappeared from my net worth in the last sixteen months – it’s hundreds of thousands. And yet I feel better about investing than I did at the very peak of the stock market’s lofty heights back in summer 2015. How could this be?

Welcome to Real Investing!

Stock market performance since I started this blog.

Figure 1: Stock market performance (including dividends) since I started this blog. Results from our IndexView tool.

The reason to celebrate is that is a completely normal and healthy part of investing. Stocks have been on an almost uninterrupted climb since I started this blog in 2011, which may have given beginners an unrealistically rosy picture. But now we’re seeing a more natural pattern, and I’m glad. Because this actually means more wealth for all of us. It’s a sale on stocks.

Buying Stuff at Lower Prices is Better

Think of it this way: Suppose you’re just starting out as an egg farmer, and your goal is to build up a nice, profitable business. You want to build up a flock of hens so big that they are eventually producing thousands of eggs per month. Enough to live off for life and retire.

You buy your first 100 hens, and they get right to work. You allow those eggs to hatch so more hens can be born, and you also continue to buy hens from the farm supply store. Suddenly your phone rings and it’s Farmer Joe down the road. “The price of hens has just dropped by 50%! You’ve just lost five grand on those hundred hens you bought last summer!”

Is this a sensible way to think about it?

No, of course not. You’re happy that hens are cheaper, because now you can build your egg business even faster.

Stocks are just like hens. They lay eggs called “dividends”, which are real money that can either flow automatically into your checking account, or automatically reinvest itself to buy still more stocks. Some younger companies don’t pay dividends, but that doesn’t mean they aren’t making you money – they are just reinvesting their profits to grow even faster – and eventually become a Super Hen.

There’s only one time you care if one of your shares is down: on the day you sell it. And as a wise lifetime buyer of only low-fee index funds, this day is sometime well into your retirement, only after you’ve spent your dividend income and drained down any other cash reserves you might have sitting around.

How to See a Dividend in Real Life

If you type the name of any stock or exchange-traded fund into a market analysis website like Google Finance, you’ll see a field called “Yield”. That’s the annual dividend payment you get for owning those shares, as a percentage of your investment. Let’s try it out:

For Vanguard’s  “Everything in the US” fund called VTI, you get this:

This fund is showing a total annual dividend of 2.04% at the time I type this.

Interestingly enough, when I wrote the basic text of this article a month ago, stocks were 10% lower and that yield was thus 10% higher (2.24%) since the dividend rate hasn’t changed even as the price swung around.

Similarly, if you look up the Vanguard “Everything Except the US” ETF with ticker symbol “VXUS”, you get this:
And its current dividend yield is 2.94% – much higher because European/World stocks are currently cheaper than US ones.

If you own shares in either of these funds, actual Dividend Eggs show up in your account every 3 months. You can use them to buy more shares, or to buy edible eggs or other groceries.

Selling Stuff over a Long Period of Time means Smooth Sailing

So you’re a Mustachian and spend your long 10-15 year career living richly on some of your salary, and accumulating loads of index funds with the other 60% of those earnings. Once your investments reach $1 million, you decide to retire, because the 4% rule indicates that should cover your family’s $40,000 annual spending forever.

Given current stock market conditions, a ‘stash like that would provide $25,000 per year in dividends alone. So you need to sell a few shares each year ($15k worth) to make up the difference.

$15k is only 1.5% of your million dollars.

Suppose that during the your first year of retirement, the market goes up by 7%, which is roughly what it does each year if you average it out over long time periods:

Now you have $1.07M, so even after the $15k withdrawal (now only 1.4% of your account!) you’re still up over fifty grand.

Suppose the market goes down by 13%, which is roughly what happened from the highest peak to the lowest point of this supposedly bad year. Despite this fluctuation in the sticker price, you still had the same number of shares (hens), and they continued to lay about $25,000 in annual dividends.

Now you have $918,000 so your $15k withdrawal on the down year puts you down to $903k.  It sounds painful, but your fifteen thousand was still only 1.6% of your balance.

And then the stock market resumes its upward march, which it always does. Some years it goes up 20%, other years it drops by 10%, but overall the continuous stream of dividends (eggs) and growth in company value and productivity (hen size) keep you well fed and happy – forever.

So What Have We Learned?

If you’re still earning money and investing it, these are good times. The more the stock market drops, the happier you should be. Just keep your primary life stable (reasonable spending, no consumer debt, good healthy habits), and pour the rest into those investments (max out the 401(k) first, then IRAs, then put the rest into normal taxable accounts).

How to Invest in Stocks:

You can get great results by knowing only one thing: “Buy a low-fee Index Fund that allows you to own a slice of at least the Entire US Market.”

There are many funds that accomplish this, but my default choice is Vanguard’s VTI. You can buy it by getting a Vanguard account, or from any brokerage account (I have my own VTI shares in a brokerage account with my bank, just because it allows easier transfers to and from the family checking account).

More recently, I switched to dumping extra money into my Betterment account (see ongoing results here). It’s the same idea: you end up buying Vanguard index funds but with a better interface, more sophisticated worldwide allocation and tax loss harvesting that makes it worth several times their 0.15% annual service fee to me. But some pretty thoughtful readers have disagreed with my choice – be sure to read the comments below that article to get their perspective.

This article is obviously just a repetition of the oldest of investing knowledge. But it’s still a lesson that very few people understand today. Please hit your friends, your financial adviser, or the commentators on your television over the head with it if they ever express fear over a falling stock market in the future.

Further Reading:

How Much is Too Much in your 401(k)? explains why you should still put money in tax-deferred accounts even if you’re planning to retire early, because you can get it out early if needed.

The Stock Series by my pal Jim Collins goes through the philosophy of index fund investing at a leisurely pace with plenty of interesting stories and folksy wisdom.


  • MarylandJeff March 1, 2016, 11:26 am

    I have a strategy that has worked well for me:

    VTI usually.

    When the market takes a beating and you’re feeling like the market is oversold, switch some assets from VTI into a leveraged ETF, like UPRO or TQQQ. When things are looking overbought, trade them back in for VTI.

    There is obviously more risk in this strategy and DEFINITELY isn’t the best strategy for noobs, but with some experience in investing it can shorten the time to FI.


    • Darell March 2, 2016, 11:00 pm

      I asked generally a moment ago, but I’ll ask you specifically since you have brought up “VTI” again. What exactly IS VTI? I’ve tried to look it up on the Vanguard site where I have an account, and there seems to be nothing that is merely VTI. It’s attached to a suffix of -PX, -NX, -VX, and on and on. There appears to be no way to buy something called merely VTI. Maybe I’m the only one confused about this?

      • Chris March 15, 2016, 7:53 am

        VTI is the ETF version of VTSAX (or VTSMX if you have less than $10,000). Buying VTI requires a brokerage account, whereas VTSAX does not. It does not cost you anything to open a brokerage account with Vanguard, and there are no fees (outside of the bid-ask spread…Google this term if you don’t know what it is) if you buy Vanguard funds.


  • Bri March 1, 2016, 11:28 am

    I’ve sorta been wondering when you’d write an article about the scary stock market and the END OF TIME AND ALL THINGS HOLY! J/K

    It’s funny, my father tried scaring me into selling off my stocks for bonds a couple of weeks ago. I tried to explain to him that avoiding some losses isn’t worth missing when the market recovers. In fact, if he’d like to give me a loan so I could buy more stocks while they were cheaper… (He laughed at me like I was kidding, but I sorta was hoping he’d say yes…Ha!)

    Thanks for the post. It’s reassuring to read a more level-headed perspective and see others in the comments section discuss it with more thoughtfulness and less scare tactics. I get so tired of the gloom and doom in traditional and online media.

  • Laur-ass March 1, 2016, 11:31 am

    Great article–I go back and forth between hoping the stocks stay low for a while and hoping they appreciate to get me closer to my goal! However, I’m a bit confused by your math regarding dividends. It was my impression the 4% rule includes dividends already or assumes they are reinvested. If you deposited them into a checking account instead of reinvesting, wouldn’t your average return go down to 3-4%?

    • Gerard March 1, 2016, 11:44 am

      Whether you put dividends equal to 4% of your stash into your savings account each year, or reinvest your dividends and then cash out 4%, the effect is the same. Doing it through the dividends saves the trouble of selling shares. (Unless I’ve misunderstood your question…)

    • skyrefuge March 4, 2016, 11:16 am

      Yep, you’re correct. I think MMM might have forgotten the basis for his “7% return if you average it out over long time periods” assumption. Dividends are included in both that “7% average return” and the “4% Safe Withdrawal Rate”. So in his example about what happens in an average year where the market has a total return of 7%, you would get $70k in total return, spend the $25k of that $70k that came in the form of dividends, and sell $15k in shares. That would leave you with and increase of $30k in your stash for the year, not $55k as stated in the post.

  • Jack H March 1, 2016, 11:39 am

    My wife and I have very different investing approaches. I manage my tax-sheltered IRA and she manages are much larger taxable account. Both are invested 100% in equities (even though we are in our middle 80’s.) My IRA is invested in four or five mutual funds (most of them Vanguard index funds.) The taxable account is invested in individual stocks. Beginning a number of years ago, she switched to companies that pay good and steady dividends. I annually compare investment returns: my IRA, the taxable account, Vanguard’s Wellington Fund (1/3 bonds, 2/3 stocks) and the S&P500 (with dividends reinvested). In the 15 years from 2001 through 2015, the highest returns annually have been: my wife in 7 of those years, the Wellington Fund in 4 years, and each of my Vanguard IRA and the S&P500 in 2 years. My wife, the stock picker, won because of her emphasis on dividend-paying stocks.

  • CashFlowDiaries March 1, 2016, 11:52 am

    The fact that the stock market has pretty much been on the rise up until this year for the last 7 years is what scares me away from investing. Last thing I want to do is invest my money at the top of any cycle. Whether its stocks, real estate or whatever. Its scary even if you are planning on riding it out for the next 10 to 20 years.

    • Tony W March 1, 2016, 2:47 pm

      Timing the market is a fool’s game. Every Mustachian knows you invest for the long term and don’t worry about some silly short time period like 5-10 years.

    • Karl hungus March 3, 2016, 6:36 pm

      But for the most part, stocks are at their peak. With your attitude, you would never invest

    • DrFunk March 10, 2016, 3:28 pm

      The most important thing is your savings rate, not your rate of return. Save 50-70% of your income for 10 years and you won’t care what the stock market has “returned”. Because you’ll still be sitting on a huge pile of cash that will be working for you.

  • Lucas March 1, 2016, 12:03 pm

    If I had a sizeable taxable account, I’d go with Betterment. Recommended it to a Physician friend the other day due to his income. Do they do harvest Tax Loss Gains for you also if you instruct them to?

  • WageSlave March 1, 2016, 12:40 pm

    “Once your investments reach $1 million, you decide to retire, because the 4% rule indicates that should cover your family’s $40,000 annual spending forever.”

    Just to be a little snarky: the investment philosophy you recommend (diversified, low-cost broad index fund) is basically the “Bogleheads” philosophy. Yet an informal survey of the BH community suggests that the overwhelming majority recommend something more conservative than 4% for early retirement: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=147931

    I know what you’re really saying is, “You can FIRE on the 4% rule (*)” where the little (*) footnote at the bottom includes a number of buts: you must be willing to be flexible (change location, move in with family, take on roommates/rent out a room, etc), you might have to go back to work, you should be able to supplement portfolio income with a hobby-job, you can further reduce spending without giving anything up, etc.

    The 4% rule was derived from 30-year studies. Readers of this blog are looking at much longer lengths of time for living off a portfolio (40, 50, 60+ years). How many diverse 50-year time periods exist for which reliable global investment return data is available? Too few for statistically meaningful analysis. It’s basically impossible to do a study similar to the Fama-French one with 50+ year timeframes using global portfolios because the data just doesn’t exist.

    Personally, here’s my conundrum: I’m lucky to have a high-paying job that is expediting my march to FIRE. But once I leave it, there’s no going back. Let’s say I early retire on the 4% rule, and just get slaughtered on portfolio returns for the next 5-10 years, i.e. worst-possible sequence-of-returns risk realized. How am I supposed to tell my family that I have to go back to work for *15* years to get to where we could have been with only *five* more years at the old job?

    • Paul F March 1, 2016, 1:04 pm

      The 4% rule is designed for just this circumstance. It takes into account the worst possible sequence of historical returns. So, if you happen to get hit like this you are likely to be just fine. Otherwise, 4% is really conservative and you will end up with many times your original wealth in the vast majority of situations.

      If you have 25X your spending, you should be fine. And if you need to take a part-time job short term, where’s the problem with that? Maybe it can be something that you really love to do that you’ve always wish you could, but didn’t pay enough.

    • DrFunk March 10, 2016, 3:31 pm

  • Mark March 1, 2016, 12:58 pm

    Hey MMM

    Apologies for the ultra-noob question (been reading the site for a while but will only now be in the position to invest) and wanted to ask what you think is the best way to determine the dividend income from an Index fund, in particular if you could target this for those of us in the UK that would be a great help.

    Love the site, thanks for the inspiration!

    • Mystic March 9, 2016, 1:18 pm

      lets take a example. google VYM it is Vanguard HIgh dividend etf in description you will see yield about 3.12% so thats your dividend income

  • Paul F March 1, 2016, 1:01 pm

    I can highly recommend this article from “A Wealth of Common Sense” http://awealthofcommonsense.com/2013/04/stocks-will-go-down-3/

    If you can’t handle a 10% drop every year, a 20% drop every 3 years and a 30% drop once a decade you should not invest in stocks. But, hanging on through that turmoil will lead to great rewards in the long term.

    I look at folks like the person who emailed MMM as my own personal edge. I don’t freak out in these downturns anymore (after 30 years you learn) and so the money he loses by selling at the wrong time accrues to me and others like me who stay in and keep on buying.

  • Drew March 1, 2016, 1:24 pm

    Clarification requested: “pour the rest into those investments (max out the 401(k) first, then IRAs, then put the rest into normal taxable accounts).” Are you simplifying the sentence? I would have expected you to say harvest any 401(k) matching money first (I get 6% for the first 8% contributed, for example), then IRAs, then back to top off 401(k) up to legal maximum and then normal taxable accounts.

    • DrFunk March 10, 2016, 3:35 pm

      Between the IRA and 401k you can do it in whatever order you want. Maybe your 401k is more convenient, maybe you have more flexibility in your IRA. Bottom line is, just save the money (tax advantaged first).

  • SB March 1, 2016, 2:11 pm

    Hi MMM, off-topic here but wanted to know your opinions on giving up meat for sustainable environment as industrial meat production is not only inhumane but very bad for environment (as also shown in recent documentary http://www.cowspiracy.com)


    • Simon Kenton March 4, 2016, 1:59 pm

      We eat deer, elk, pronghorn, wild-caught salmon, halibut, and moose when we can get it.

  • Andrew March 1, 2016, 2:38 pm

    MMM: Funny I very much agree with your comments on Betterment. I opened the account because I thought it would be nice to see how it operates. I had my my 19 and 22 year old boys in mind when I opened this because I don’t think either care too much about investing. I have found the tax loss harvesting more than offsets the fees. Most of my assets are held at Vanguard and while I will once in a while swap one fund for another I really like the allocation of Betterment and the simplicity and the tax loss harvesting. I think I will actually keep the account and grow it. My experiment with Prosper Lending didn’t go as well. Thanks!

  • Ishabaka March 1, 2016, 2:39 pm

    Scary? MMM isn’t old enough to have been through scary. Try the Crash of 1987 – Dow down 22.6% in one day. When you can lose 1/5th. of your paper net worth in 6 1/2 hours and not flinch, you’ve survived scary.

    • Jonathan March 2, 2016, 8:16 am

      The crash of 1987 was a one-day event that impacted very few people, mostly investors.

      However, in 2008-9 it looked like the entire financial system was in danger of collapse. If all the banks went broke, nobody would be able to get cash, write checks or use credit cards – it would be the end of the world. Now that was scary.

      • Mark March 6, 2016, 3:19 pm

        Agreed. 2008 was a lot scarier than 1987. The market lost 37% in 2008 and still gained in 2007, despite the one day crash.

        • DrFunk March 10, 2016, 3:36 pm

          I think you mean “still gained in 1987”.

  • Tony W March 1, 2016, 2:44 pm

    I’d like to add my name to the list of folks interested in precisely how to invest the money needed over the next 2-3 years. Is there a special Mustachian method for assuring that money is working hard for me but also available when needed?

    For example, If I was risk-adverse I could simply keep 2-3 years of spending in cash or equivalents and roll money into that fund when times are good, but that lets a large number of my employees sit around the water cooler gossiping about the latest Kardashian exploits instead of working hard for me. Similarly I could end up forced to give up future gains if I don’t have enough buffer.

    Thanks in advance!

    • DrFunk March 10, 2016, 3:59 pm

      Check the forums. They are likely to tell you to keep as much cash on hand that you can sleep at night. But, if you are already FI, you are probably already sleeping well at night and will keep most of your money invested. For emergencies you have a credit card, or a personal loan, or HELOC that you can pull from. You really don’t need that much “cash”.

      If you aren’t already FI, then you should only keep ~3-6 months of cash.

  • The Roamer March 1, 2016, 3:21 pm

    I’m happy I’ve internalized that losses are good in the sense of a sale. But looking at numbers still kind of pisses me off. The funny thing is I’m more likely to blame it in the brokerage fees then on something I could correct by selling.

    So I just try not to look to often but I know when people are saying it’s Down so that it’s not such a shock when I do look.

  • Rich March 1, 2016, 8:38 pm

    Buy and holding index funds is generally wise for individuals who may be to busy or uninterested in learning other means of investing. However, we should be advising to diversify outside US markets. There are major indices in other industrialized countries that have been flat for 20+ years. It’s naive to think that can’t happen here.

  • Trader Travis March 2, 2016, 12:23 am

    Mr. MMM,

    I’m a long time reader and I’m so hurt to read your comments about technical analysis. Maybe you feel the way you do because no one has ever showed you how to use it correctly. It’s nothing, but data analysis.

    “Out of belief, comes reality”.

    I never believed technical analysis didn’t work so now using it successfully is my reality. Those who feel it’s worthless never succeed at it.

    Mr MMM, you’re a smart guy and I admire what you have done, but it really hurts when I see really smart people be misguided by their closed minds.

    Just so you know where I am coming from here is what I have been able to do with technical analysis.

    I used the market crash of 2007 – 2009 to double my 401K account. I used nothing advanced, just a simple tweak to the traditional buy and hold concept.

    I also applied Warren Buffett’s philosophy’s and found a way to double my investment return by staying in cash while the market goes up and only buying when it falls 20-40%. If you pay close attention it’s somewhat what Warren does.

    None of the above requires any advanced knowledge of investing. It’s just simple tweaks I learned from a few millionaires many years ago.

    All these years I had assumed others were doing the same until I started mentoring others and discovered the shocking truth :(

    My specialty is options trading so I combined the strategy above with stock options and I get paid to buy ETF’s at a 20-40% discount. So it’s a Warren Buffet “buy low strategy” with a side benefit of monthly income.

    And last year I earned a 211% return on my invested cash last year. It took me all of 10-15 minutes a day and 90% of my money was in cash.

    I have full proof and can show brokerage statements and the sorts. I could even teach your members how to do it if they wanted to know, BUT….

    As I said earlier…”out of belief, come reality”.

    I was mentored by several millionaires years ago so I never thought any of the above was impossible. Now it’s my reality.

    Those who think earning 211% a year is impossible, it never becomes their reality.

    I read blogs like this and meet people everyday who tell me that what I do is impossible. Gosh, I want to scream some times!!!!

    Please have an open mind about concepts you are not experienced with. Mr. MMM if you want I can see you a short 5 minute video with proof of all of the above.

    But if you are like most and skeptical don’t worry about it and I wish you well.

    • Mr. Money Mustache March 2, 2016, 7:18 am

      Hey Travis, thanks for reading and commenting. But see, your type of story is exactly what messes up new investors. “Oh, this guy did it! I guess all the academic studies were just a conspiracy! Sign me up for the 211% annual returns!”

      Your language is that of anecdote and not of science. Also, your website shows you are selling options trading coaching, which tends to undercut the message.

      Many people have stories like that, and I’m happy for their success. I am not contesting your personal results. But what the scientists do is round up 10,000 Trader Travises with recent amazing returns and start tracking their results. Over time, some of them start to have some bad years, and some go completely broke. Over a longer time, people revert to average performance, minus their trading costs.

      There may still be still a few expert dice rollers in the group. But the key is, nobody can tell in advance which traders are the ones to be successful in the future. There is no long-term correlation between those who had big recent successes, and those who are still making money many years down the road. This is because market conditions change and temporarily profitable niches close and even reverse themselves. When you combine this with our natural human tendency to become greedy and overconfident, the results are even worse. Consider this: hedge funds employ the best brains and technology in the world. Huge teams of 160 IQ math and computer science grads. But their niche has closed and they now underperform the index funds on average.

      To prove you are not just another statistic already accounted for by the statistical wonks who analyze this stuff, you have to at least understand their methods, then find a way to show that you are truly doing things differently than everyone else.

      • Jonathan March 2, 2016, 8:25 am

        In any game that combines skill with gambling, there will be a small group of people who are consistent winners.

        If you look at the big poker tournament in Las Vegas, the same few guys show up every year in the finals. They are highly skilled and win a lot of money.

        Where does this money come from? Everybody else! They win the money of people who are unskilled, somewhat skilled, and not quite highly skilled. So for every winner, there are hundreds or thousands of losers.

        The stock market is like this, but even more so. Guy who are brilliant mathematicians regularly enter the lists. The competition is brutal, as everyone tries to come up with a scheme that will consistently make money. But because for these guys ‘making money’ means taking the other guy’s money, the rules and opportunities are constantly shifting. A strategy that worked before will stop working as soon as everyone adopts it.

        Naturally, the most high skilled guys welcome and encourage new players. They need the money.

        • Trish March 2, 2016, 4:38 pm

          The reason most hedge funds, mutual funds, and active investors cannot beat the market is simply because they ARE the market. Their funds make up the vast majority of the market – and the studies that show they cannot consistently beat ETFs is after their higher fees are taken into account. Stock prices are not truly “random” as some people seem to believe – they are tied to economic fundamentals (from a finance point of view, the current share price is the sum of all expected future dividends and final payout at the windup of the company, discounted for the time value of money – using a discount rate that takes into account risk – to present value) – but as everyone has the same information, the efficient markets hypothesis says that you can’t beat the market because you can’t beat everyone else.

          The US market is fairly efficient, but not perfectly efficient. No market is perfectly efficient. The efficient markets hypothesis assumes that information is costless and accessible to all – this is obviously a flawed assumption, as people are able to make above-average returns by trading on inside information. Substitute “inside information” for “superior analysis of available information” and it’s the same, in my opinion. Of course, how do we determine what is “superior analysis” and what is just luck? A person who has made very good returns recently may have been smarter than everyone else, or may have just lucked out – that is where the poker analogy comes in – an important difference though is that poker is a zero-sum games, while stocks are not.

          So – all that being said, it’s true that most people can’t beat the market. Just like most people don’t have above-average IQs, and can’t be above average drivers. I agree that buying and holding ETFs is probably the best course for most people, ESPECIALLY newbie investors who do not understand finance and economics. I myself hold ETFs for now because I don’t have the time to look into researching stocks, and can’t really be bothered. I do have an unusual amount of cash reserves at the moment because I do think the stockmarket will fall further still – some will say it’s a fool’s game but I see it as relatively little downside I might miss out on 1-2 years of pretty average gains – a boom doesn’t look like it’s coming anytime soon), with a great potential upside (I intend to incrementally buy back into the market if stocks drop 15-20% from their current levels).

      • Trader Travis March 9, 2016, 1:27 pm

        Ahh got it! Your comments make perfect sense now. I see where you are coming from and I thank you for taking the time to clarify. Really I do, I have much respect for you and what you do.

        “Your language is that of anecdote and not of science.”

        I guess that’s what bothers me the most. Science is largely keeping people broke because it’s not encouraging them to be great! Instead the science is used an excuse to not even try.

        So yes all your points and comments are correct. The science is correct (I guess), but it’s not the whole story.

        My mission is simply to encourage people to have an open mind. Your mind was recently opened regarding doing your own taxes or hiring someone else to do them.

        As far as I can tell you like your real world results in the same way I like my results that are opposite of what science said was possible.

    • Chris March 4, 2016, 8:01 am

      You had me until you mentioned the 211% returns last year. The method you describe IS similar to what Warren Buffet has mentioned. Invest 100% of your money during a major downturn, and then slowly retreat to cash after about 3 years. He generally recommends having 20% of your portfolio in cash, and more if we are more than 7 years beyond a recession. This makes sense, and historical data shows it works. But…

      There’s nothing about this method that could possibly imply a 211% return for 2015. You’re using something logical to support something illogical. Also, WB hates options. Quoting WB might draw readers, but your methods obviously have nothing to do with the investing legend.

    • Chris March 4, 2016, 10:54 am

      Just so people know. Options Trading CAN be very profitable via dumb luck, especially when you’re at the volatile end of a bull market. You can get lucky and exploit people who think the market will continue to rise like it did in 2012 thru 2014. You can also get very lucky trading on the volatility.

      So… I’m not surprised that someone made a 211% return in the options market last year. I just question anyone who advertises it as anything but dumb luck. One data point achieved during a perfect storm of economic events does not make for sound long term investing advice.

      • Trader Travis March 13, 2016, 10:25 am

        Hey Chris, your comments have been bothering me for some time so I wanted to come in and apologize.

        My 211% return on my invested cash was taken out of context because of the way I wrote my initial comment.

        My original post was just sharing all of the things that technical analysis helped me do. I should have emphasizes that the 211% was due to options trading not Buy and Hold, but all the other 401K results etc. were through Buy and Hold.

        Also you may want to fact check your thoughts on Warren Buffet because according to his shareholder reports he does trade options (smile).

        Many are familiar with Buffett’s widely circulated quote that derivatives are “financial weapons of mass destruction.” Options are, of course, derivatives in that they derive their values from their underlying. But Buffett actually does quite a bit of options trading himself.

        You can do a quick google search to verify this yourself. Forbes wrote an article about it back in 2012 and he also talks about selling options in his shareholder reports.

        It’s nothing advanced. We just sell cash secured puts so we get paid to buy stocks we want to own at the prices we want to own them at.

        But again, I am sorry my results were taken out of context as I wasn’t trying to imply that I earned 211% following Warren Buffett’s ways. The only thing I did modeled after him was using the market crash of 2007 – 2009 to double my 401K.

        Chris, I wish you and every other Mustachian much success and sorry for any offense caused.

  • Mise March 2, 2016, 3:01 am

    If anyone out there in Ireland is considering this type of topic, do reply here.

    Our ETF index funds outside of retirement funds are taxed at 40% every seven years. Index fund investment isn’t a way to reliably build wealth here. There are other alternatives for sure, like build your own business, and real estate.

  • RTBinFFM March 2, 2016, 3:38 am

    One thing to also keep in mind during any market downturn (the current one, the one in 2008, the Great Depression, etc.) is that certain assets and things we need to buy (houses, rent, food, gas, etc.) also tend to get a little cheaper, especially in the nastier/longer sorts of downturns.

    Without going into long examples from the Depression, my guess is that a majority of people that lived through that period who made Mustacian-type adjustments (a hell of a lot of them) came through it more bad ass, frugal and in relatively good shape … even if their net worth took a hit.

    So for Mustacians who are already living or trying to adjust to more frugal lifestyles, (potentially) nasty (or long-term future) downturns should provide opportunities to spend less, re-visit one’s housing situation, spend less on gas, food, travel, vacations, find a small paying vocation, etc. All of which can certainly lead to happiness and bad-assity.

  • Tyler Durden March 2, 2016, 4:20 am

    How do you know stocks are priced low? They are just relatively low compared with a recent high.

    Every predictor of stock prices — including the linked shilled pe predictors–is just pure bunk.

    While admittedly stocks are up most years than they are down and, assuming that will be true in the future (although no guarantees) you could be at the start of a big bear market.

  • Liz March 2, 2016, 7:08 am

    Greetings, Mr. Money Mustache!

    Love the articles! My husband and I are on the path to early retirement thanks to your advice. A question regarding Mutual Funds. I currently have a broker who manages my Roth; he has been using Lord Abbett. What can you tell me about Lord Abbett vs Vanguard? Thanks much!

    • Chuck March 2, 2016, 4:45 pm

      Lord Abbett funds have a heavy load (5.75% if your investment is less than $50,000 – amount drops if you have a really big account) this pays your broker for putting you in this fund. Every year the fund charges about 1% for expenses. This pays to make the investments. Vanguard charges no sales load and its annual fees are about one fifth of what you are paying. (When the account gets large enough, they drop the fees even more)
      My Roth is at Vanguard. I don’t have a broker and just call the Vanguard toll-free number.

  • Matt March 2, 2016, 7:57 am

    I always just say to invest no matter what, because the likely benefits from doing so far outweigh the possible drawbacks.

    Actually, are there any real drawbacks? It seem that every time someone brings up one of the “risks” of index investing, they bring up some crazy worst-case complete financial crash or reversal which has never once occurred in US markets.

    But even still, what if your investment/FI dreams don’t work out? You go get a job like everyone else in the world and work until social security kicks in. Or you armor plate your car to go fight in the road wars that would obviously accompany a complete crash of society and all financial markets.

    So best case (likely) scenario you retire very young and live a long life of complete freedom and ridiculous wealth, and worst case (unlikely) scenario you live the life you probably assumed you would live until you discovered ERE/MMM/YMOYL, or what have you.

    I feel like that’s a risk that takes itself, man.

    • Jackson March 2, 2016, 8:29 pm

      I agree with your viewpoint -except for those who are nearing retirement. For those near or in retirement, the sequence of returns makes a huge difference. If equities are flat or have very low returns in the first 5-10 years of retirement, that can greatly increase the risk that retirees will outlive their assets.

      That’s why Target Funds aimed at retirees tend to have a larger share of lower risk assets as the fund gets closer to its Target year. This helps to offset equity risk .

      If retirees continue to take a 4% draw -even in years with very low returns – they are raiding their principal.. However,if they have cash saved to last a year or two -avoiding a draw from their main retirement funds- they can wait out the low return years,

      The other option is lowering the draw rate, possibly below 4% – if retirement Researcnerslike Wase Pfau are correct. I sure hope his view that a 3% draw rate might be more realistic in the future turns out to be inaccurate!

      • Matt March 3, 2016, 6:05 am

        That’s a great point, and not one I generally think about since I’m still firmly embedded in the stash-growing phase. Stash maintenance is still a far-off worry.

        But if we’re going with the 4% rule here, and predicting bad markets, all that should be necessary is that you earn a very small amount of real income during the off years so that your withdrawal from the stash doesn’t exceed 2-3%, right? But then again, if you have to make money, we all know you’re not really “retired”, so there’s that to “worry” about.

        It just continues to make me sad to see so many people my age (mid to late 20s-ish) who have saved quite literally nothing. And all I can think is “but in like 20-30 years the compound interest will be INSANE if you start investing now!!!!!!” And they don’t even care. Instant gratification junkies, all of them. :P

  • Justin Colletti March 2, 2016, 9:47 am

    All fairly sound advice, but it seems to ignore one very important nuance:

    The CAPE ratio (or “cyclically-adjusted price-to-earnings”) at the time of purchase really does matter when estimating future returns of any stock index.

    If you buy stock indexes when the CAPE ratio is very high (say, over 15 or so) then you will tend to have long-term returns that are far poorer than if you bought when the CAPE ratio was low.

    So, if you have been actively buying US stock indexes for the past couple of years when their CAPE has been way higher than the average, your long term return is likely to be very low on that portion of your stock purchases.

    There is absolutely an argument for not buying stocks when they are overpriced in the first place, and instead investing in assets that are currently under-priced. This assessment does not address that reality.

    There is even a reasonable argument to be made for selling stocks that you brought when they were over-priced (that is, above the long-term, cyclically adjusted median P/E ratio) before they return to being drastically under-priced.

    When US stocks are as overvalued as they have been, it does indeed make more sense to buy other, undervalued assets instead of US stocks. The concept of “opportunity cost” is very much at play here.

    Still, you’re correct to say that if you bought stocks at a low price or fair valuation for the long haul, it makes good sense to hold them during any downturn, especially when you take capital gains taxes into account.

    However: If you bought stocks when they were very expensive, it may be very wise to sell them before they become very inexpensive. Otherwise, you could be looking at a decade’s worth of zero growth, including dividends, and lost opportunity to buy undervalued assets.

    Remember: People who bought only overpriced stock indexes in 1999 or 2000 are still working at recovering their principal, when adjusted for inflation. Many of them have had a net *loss* to date when adjusted for inflation, though dividend payouts may have taken some of them slightly positive if they’ve had the patience and fortitude to hold for the past 16 years.

    Bottom line is that it is indeed important to look at the CAPE ratio for stocks, and their inflation-adjusted valuations as well. US common stocks are not the only worthwhile asset class, and they can not be considered the best buy regardless of current market conditions or valuations.

    US stocks can be great in the long-term, but this depends on their purchase price. Thinking that they are the only worthwhile asset class—or that valuations at the time of purchase don’t matter—is what leads to bubbles, lowered returns and loss of principal.

    Holding more cash than usual has indeed been the best performing strategy for the past year or more, and the best performing strategy in coming years is likely to be holding foreign stocks and commodities that are currently dramatically underpriced compared to US equities.

    When US equities return to sensible valuations and reasonable P/E rations, purchasing them will likely be the best-performing strategy once again.

    Patience and prudence does matter when it comes to investing. But so does relative value.

    In your example, why would you buy overpriced chickens when cows are selling at a deep discount? And, might it be wise to sell some of your chickens when they are overpriced to buy cows when they are underpriced?

    That’s just good business. The same goes for your portfolio.

    Thanks for reading,


  • Scott March 2, 2016, 10:54 am

    Question about the 4% rule – does it assume dividend reinvestment? This post seems to suggest that it does not – that a person can take all the dividends AND withdraw 4%.

    If the original study, however, assumed that you were withdrawing 4% every year but were reinvesting dividends – then the strategy above would result in withdrawing too much.

    I googled this quickly but could not find an answer about what the 4% rule assumes with respect to dividends.

    Any ideas?

    • Mr. Money Mustache March 2, 2016, 11:45 am

      No, any dividends you pull out and spend would count as part of the 4%, as illustrated in the math examples of this post. So if you get a 2.5% dividend yield, you might choose to limit your additional share-selling to 1.5% annually.

      • skyrefuge March 4, 2016, 11:07 am

        Yes, and so I think some of your language/math in the original post is incorrect. You said:

        “Suppose that during the your first year of retirement, the market goes up by 7%, which is roughly what it does each year if you average it out over long time periods:

        Now you have $1.07M, so even after the $15k withdrawal (now only 1.4% of your account!) you’re still up over fifty grand.”

        In your previous “4% rule” post, you assumed “[stocks] pay dividends and appreciate in price at a total rate of 7% per year [on average]”. Whereas here, your language/math accidentally shifted, and assumes there is an average 7% *price* increase per year, and an additional 2.5% divided return on top of that, for a total return rate of 9.5% per year!

        If we use your original 7% average total-return assumption, in an average year, your $1M would turn to $1.07M due to BOTH dividends and price increase. You would have to both withdraw the 2.5% dividend ($25k) and sell $15k of shares, reducing your stash to only $1.03M. You would be up thirty grand (or 3%) for the year (7% total return – 4% SWR = 3%), not “over fifty grand” (5.5%).

        More broadly, it’s unnecessary and confusing (even to you, we see!) to break out and focus on dividends as a component of “total return”. I understand that the regular payment of dividends are a nice psychological comfort to make novices feel better about putting their money into something whose price may go down, but it’s a false comfort, because the payment of those dividends that make the price go down *more* than it otherwise would!

    • scott March 2, 2016, 2:06 pm

      Most of us will never be able to use the exact strategy described above by MMM (4% = 2.5% dividends + 1.5% share-selling). In the early years of retirement, the typical early retiree will have some portion of their investments in tax advantaged accounts. This will prevent them from taking 100% of the dividends as cash. Only a fraction of a portfolio’s total dividends will be available to cover their living expenses. So practically speaking, most early retirees will need to reinvest the dividends from investments held in their 401k, IRA, etc. and then sell > 1.5% of their shares (shares sold will come from one’s taxable investment accounts) in order to cover annual expenses under the 4% rule.

      I know there are ways to access 401k and IRA savings before traditional retirement age, but again, most of uswill not have full access to those savings in the early years of FIRE.

  • Lena March 2, 2016, 11:46 am

    I love the chicken and egg analogy. I used it to explain the stock market and dividends to my mom and she finally understood what I was talking about. Nicely done!

  • rcfarias March 2, 2016, 2:34 pm

    BRK.B would be a better option for those who doesn’t want(or dont know) how to reinvest dividends?
    On the long term seems better than VTI.
    BRK.B for accumulation phase and VTI for retirement phase?


  • Mainah March 2, 2016, 7:39 pm

    MMM – A basic question if you don’t mind: why would a $1 million portfolio provide $25,000/year in dividends alone given current stock market conditions? I’d appreciate your spelling this out for me. Thanks.

    • Mr. Money Mustache March 3, 2016, 8:43 am

      That’s a great question Mainah that I totally need to add to the article itself:

      If you look up the actual name of the fund in question, you can get the dividend yield, just shown as “Yield”. For VTI, you get this
      https://www.google.com/finance?q=VTI – it is showing 2.04% annually at the time I type this.

      Interestingly enough, when I wrote the basic text of this article a month ago, stocks were 10% lower and that yield was thus 10% higher since the dividends haven’t changed.

      Similarly, if you look up the Vanguard international ETF with ticker symbol “VXUS”, you get this:
      And its current dividend yield is 2.94% – much higher because European/World stocks are currently cheaper than US ones.

    • Jonathan March 4, 2016, 7:05 am

      For individual-stock investors, how much you collect in dividends depends on the structure of your portfolio. In the current market, it is possible to construct a portfolio that pays as high as 5-6%, and is still fairly safe under most circumstances. My current main portfolio yields 4.57%; it is 86% blue-chip common, 6% preferreds, and 8% REITs.

      I am retired and live on my investment income. If you were a young guy, you would want a different mix of stocks, although “growth” stocks usually turn out to be a money-losing disappointment.

      But if you needed the income, you could certainly take $1 million dollars today, and invest it in a portfolio that would yield a nice income, enough to live on if you already own your house and have reasonable expenses.

  • Steve March 2, 2016, 7:54 pm

    Hey MMM,

    Thanks for this post. It’s very timely as my emotions were mounting a take over.

    I’m a 1-1/2 years all in with Vanguard and needed some sage reassurance that the market is not going to collapse.

    Quick question. You stated that you own Vanguard VTI with an account through your bank and have a Betterment account.

    I see that Betterment uses VTI ETFs as a core holding in their portfolios. Is there any conflict using their auto Tax Loss Harvesting since you hold similar shares in different accounts?


  • CaveDweller March 3, 2016, 5:37 am

    MMM, loved the recent New Yorker article…

    When is the build-your-own-computer post coming out? Inquiring minds, my friend!

  • isaac March 3, 2016, 7:38 am

    If your sole investment criteria is profit, you are telling the market that the only return you expect is money and that you do not expect any social responsibility and that is exactly what you are going to get. This doesn’t apply just to cheap disposable fashion, it also applies to the BP oil spill. Telling ExxonMobil to pursue profit ahead of all other concerns is telling ExxonMobil to “drill baby drill”, and hoping that some mixture of consumer and employee actions (boycotts, strikes) will tell them something different.

  • Travis March 3, 2016, 10:21 am

    Hi MMM!

    I’ve read nearly your whole site and have been educating myself towards pulling the trigger on purchasing some stocks. I think I have a decent grip on the Shiller PE stuff and found this line about the VXUS fund intriguing:

    “And its current dividend yield is 2.94% – much higher because European/World stocks are currently cheaper than US ones.”

    Does this suggest that the dividend yield (like the Shiller PE) can also be a reference point for the releative “cheapness” of a fund? And would it be sensible to use the Shiller PE combined with a current dividend yield as data points for knowing how good of a time to buy it is?


  • Lynda March 3, 2016, 12:47 pm

    On February 11 I transferred $10,000 from our checking account to our savings account. We’ll need the money in a month or two for pay for improvements to our rental cottages but I thought, “What the heck. I’ll let the bank buy me a beer with the little bit of interest gained.” Just went online and saw for the month of February it made TWENTY-SIX CENTS! A sip of beer only, methinks. Even if you are a Nervous Nelly, you’ll make more in the stock market than you’ll ever make in a savings account.

  • Chris B March 3, 2016, 3:06 pm

    I despise dividend paying stocks. It is a foolish thing for a business to do. Why?

    1) Dividends are taxable (unless in your IRA). Thus, if I pay you $2 for a share of your company, and you give me one of those dollars back as a dividend, not only is the company worth $1/share less than before, but I also now get to pay a 15% tax in the “income” of getting my $1 back. My $2 investment is already down 7.5% because of a management decision – normally the kind of strategic blunder that gets people fired. Had the company done a share buyback instead, or something really radical like invest in growth or R&D, my taxes would be lower – and in some cases the company’s taxes too.

    2) If I need “income” I should sell shares or own bonds instead. Commissions are only $4-10 vs. taxes at 15%! There are plenty of income opportunities. Last month, for example, I loaned to a huge oil company with 5 quarters of cash already on hand at 14% APY for 1 year! (NBL for the curious).

    3) Most importantly, when management pays a dividend, they are saying “We have these millions of dollars and can find no productive application for them. Our business can’t possibly grow, so investing in marketing or new products won’t work. Technology will never change, so there’s no need to put that money into R&D. Quality programs? We’re already perfect. Our frickin’ facilities must be insulated to R-60 and all lightbulb are LED’s…” yada yada.

    4) Many of these dividend payers are borrowing money to issue those dividends. Look up how many millions of dollars in interest your company pays rather than skipping a year of dividends and retiring some debt. Would you run a household that way?

    Bottom line: why would anyone hire hopeless, out-of-ideas managers who promise to recycle your money back to you, incurring tax liabilities and interest expenses instead of improving the business?

  • Karl hungus March 3, 2016, 6:33 pm

    Wow, a lot of people are missing the point. I think they all need a reminder of bob, the world’s worst market timer. http://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

  • Kenatsun March 3, 2016, 6:51 pm

    Dear MMM ~

    Just discovered you (via the New Yorker article). I’m so aligned with your world-view (or the part of it that I’ve encountered so far) that I suspect we are twins separated at birth. (Maybe not, since I’m twice as old as you…)

    A question on the current topic: I’m currently paying an investment manager 1% to handle my investments. I’ve long been attracted to the alternative of index funds (plus maybe Betterment, which I’ve just heard about from you for the first time). I’ve long been intending to compare my manager’s performance (I.e. my portfolio as managed by her) with that of Vanguard index funds, but until now I’ve been too lazy to actually do it.

    Following links from your site, I now have the performance of VI (and others) in spreadsheets. And I have reports from my manager for the last ten years too. I was about to munge these together into a spreadsheet of my own making, to do the comparison.

    But one thing I’ve already discovered about MMM is that you have gone out and found useful calculators that are better for their respective purposes than the ones I have cobbled together myself over the years. So I’m wondering if anyone has a calculator to recommend for comparing the historical performance of different investment schemes. I’m envisioned something where one can plug in the monthly or yearly results of each scheme – including my personal portfolio, which of course I can’t just download from the web somewhere – and see who wins.

    ~ Thanks in advance!
    ~ Ken, your long-lost twin

  • Stefan March 4, 2016, 5:04 am

    Dear MMM, Thank you for this post. I am a long-time reader and following some of your advice has made a positive impact in my life. Based on what you say about Betterment I will check it out.

    I have a question about the expected future long-term return of the stock market. In view of historical lows of interest rates, do you believe that it is reasonable to assume that long-term stock market returns will remain at 7%?

    My other question: For the last few years you have shared your annual spending. I’ve always found it helpful gauging my own spending level and making my use of money more efficient. But I haven’t seen it for 2015. Are you still planning to share this with your readers?

  • Rick March 4, 2016, 9:45 am

    This is good advice for a market that continues to go up.. BUT, its only a matter of time before we have another 1929 style market crash..losing 90% of your account value and taking another 30 years to recover. Most folks cannot tolerate a 10% correction let alone a full crash.
    So, if that happens, your 1 million account will be worth $100,000.
    Get out of paper assets! Invest in real estate for cash flow.

    • Mr. Money Mustache March 4, 2016, 4:50 pm

      From the very tip of the 1929 peak to the lowest point of the great depression 1932, you would have lost 79.3% after dividends. But there was 20% deflation during that period so it would have felt more like a temporary 60% paper loss.

      Then you’d be back up to turning a profit 15 years after the original peak, and off to the races from there (your money would triple over the next 10 years, because of course you were starting from a very low point).

      There’s nothing wrong with good real estate investments, but stocks are amazingly powerful as well.

      • lurker March 6, 2016, 10:28 am

        bad example. many business died and their stocks went to zero….IF you happened to own the companies that survived then the 60% drop was “temporary” and also you and your family might have needed the money to survive or the bank that had your money went under….the risks in the depression were a lot higher than your quick example implies. great New Yorker article by the way.
        and great blog.

        • dandarc March 6, 2016, 1:15 pm

          Which is why you should invest not in a single company, but many. It was true in the 20’s and 30’s, but the big advantage we have today, is that it is much easier and cheaper to do that – nothing like the best index mutual funds like VTSAX was around back then.

        • Kevin March 7, 2016, 7:56 am

          To add to dandarc’s correct info, one should also always have a 3-6 month emergency fund. Also, banks aren’t going to “go under” unless the entire US economy collapses, because of this cool thing called FDIC.

          An additional note, which may be controversial to some — it’s well known that several HUGE mistakes were made by Hoover, and later by FDR, after the 1929 crash. The recovery from the great depression could have and should have been MUCH faster. While there is no guarantee that economic advisers and political leaders will do a perfect job after the next crash, we have a much better understanding of what the main terrible mistakes are and how to avoid them. Doesn’t mean we can’t have future ‘black swan’ events, but we are much less prone to a repeat of the Great Depression than most people believe.

  • pedroTFP March 4, 2016, 12:24 pm

    I live in Europe (Italy), I love S&P500 ETFs but investing in S&P500 from here expose me to currency exchange risk, which could randomly kill any profit. So, the ETFs I look at are the ones about euro stocks, like VEUR.AS and similar from iShares and Lyxor. What do fellow mustachian think about European Stock Market? Any hint?

  • Phred March 4, 2016, 1:49 pm

    I keep 30% of my money in the bank. Each year a 5-year CD matures, and I renew it for another five years. This is called laddering. Not a sky-high return, but a lot better than 0.05%

    Actually, I have one 5 year CD maturing each quarter of the year. I use four different banks. I can always cash one out if need be and renew for a smaller amount

    I’ve now lived in one place long enough to get to know who is trustworthy, and who is not. I make little loans to small, local businesses at 12% interest. I always get some boot besides; getting to buy bicycle parts at cost works out well

  • Brian March 4, 2016, 8:13 pm

    “max out the 401(k) first, then IRAs, then put the rest into normal taxable accounts”
    Ok, if you make a lot of money, or already own a home. But for those of us saving for a home who only make an average salary, if I were to max out 401k and IRA contributions there would be nothing left. I invest just enough in my 401k to take full advantage of my employer match, and put the rest in taxable accounts to use for a down payment. Can you tell me what’s wrong with my rationality?

    • lurker March 6, 2016, 10:43 am

      nothing. just don’t overpay for the house and be sure you really want to own one….

    • Peter Le March 7, 2016, 12:57 pm

      All about opportunity cost. If you aren’t maxing out your 401k then you aren’t taking advantage of the tax deduction a 401k provides. If a person is in the 25% tax bracket and doesn’t contribute to their 401k (just to make this example easier), then basically they lose $4,500 ($18,000 x 0.25) to Uncle Sam. That $4,500 could have been used to grow tax free in their 401k, but instead chose to pay the tax man $4,500 to get immediate access to $13,500. Yes you have to pay taxes later on the distributions, but there are ways around to minimize/eliminate this taxes (72t, Roth IRA ladder).

  • J P Frogbottom March 5, 2016, 8:56 am

    So 2016 didn’t start off great. It was a GREAT time to buy into the markets on sale. Now 2 months in I am well ahead of where the year began.

  • Tom March 5, 2016, 10:24 am

    So dividends from a $1,000,000 portfolio should be about $25,000 . Is this amount generated from assets in both retirement and non-retirement accounts? I know you have to pay income tax on dividends but is there an extra IRS tax penalty if you take dividends generated from funds in a retirement account and send them to your regular checking account?

    • Jonathan March 5, 2016, 1:49 pm

      Actually, if you held you money in a non-retirement account, and received $25K in dividends, and that was your only income, you would pay no Federal income tax whatsoever. However, if the money was in a retirement account, and you withdrew the dividends, you would pay full Federal income tax. as such withdrawals are treated as ordinary income.

      It pays to know the tax code!

      • dandarc March 7, 2016, 9:40 am

        Of course if you’re married filing jointly, the ordinary income rate is 0% on a bit more than the first $20K (standard deduction + 2 exemptions) of that, so it would only be 10% of $5000.

        Better yet – have money in the IRA as well as in a taxable account, shelter taxes on the way in, and pay 0% taxes on the way out as well.

        • Jonathan March 7, 2016, 3:01 pm

          Just to be clear, if your income consists solely of qualified stock dividends, you can have an income of up to about $47K if you are single, and about $98K if you are a married couple, without paying any Federal income tax.

          However, you will pay state income tax if you live in a state that has an income tax.

  • Jordan March 7, 2016, 3:54 pm

    I wanted to add a small caveat to the guidance to max out your 401k, and then IRA, and then contribute to taxed accounts: if your company permits After Tax 401k contributions, you can make those and then roll them into a Roth IRA once you leave the company. Therefore, exceeding the $18,000 401k annual contribution limit may be wiser than putting that cash into taxed accounts, if you have this option. My husband and I are in a relatively high tax bracket with a relatively high savings rate, and this essentially enables us to minimize our tax exposure. Here is more on this strategy: http://www.forbes.com/sites/ashleaebeling/2014/09/19/irs-issues-401k-after-tax-rollover-rules/#5dc9c15047b6

  • Dave March 8, 2016, 10:39 pm

    Blindly dumping money in the market at the end of each month is just plain stupid. Instead buy a bit on days of the year when the market closes >= – 1.5%. You’ll do much better in the long term. It’s called smart dollar cost averaging.

    • Dave March 8, 2016, 10:42 pm

    • Peter Le March 11, 2016, 12:59 pm

      An issue with this is what if in the previous 5 days, the market went up 10% and then on the 6th day the market goes down 1.5%. If you go by your strategy, then you lost out on the opportunity to get any of the previous gains by your rule of only buying on the days the market is down +1.5%. In a sense, this is a form of market timing, which everyone knows is a fools game.

  • Dylan March 9, 2016, 11:10 am

    So I have a question. I believe MMM has said by the 4% rule it’s feasible for two to retire at 400k.

    My question is: Is it feasible for one person to retire on 200k at 4% or say 400k at 2%?

    Thanks! And btw these kinds of articles are what keep me coming back to this blog!

    • DrFunk March 10, 2016, 3:19 pm

      If you have a paid off house and you have a side hustle that brings a little cash in per year($5-10K), then I’d say $200k is enough for 1 person to “retire”. But, that 200k will only give you 8k in spendable cash per year (using 4%) – that’s pretty tight by anyone’s standards. I’d think 1 person needs to have ~$15k in spendable cash per year to be feasible. The more people you add on the less you would need (doesn’t add quite 15k for each new person due to overlapping costs, like heat, electricity etc).

  • Mystic March 9, 2016, 12:45 pm

    ” If you loose 50% of your investments in a crash, you would require 100% growth to get even.” To avoid that i like this passive portfolio: 40% VYM- Vanguard High Dividend ETF; 30% VIGI- Vanguard international dividend growth etf; 5% GLD, 10% Vanguard REIT, 5% CFD- commodity etf, 5% VDE- energy etf, 5% GDX- Precious mining etf.

    This is not a strategy to beat the market but diversifying in all major asset classes that maybe inversely co-related. Much lower volatility and almost same growth as S&P over last 70 years.

    • Dave March 9, 2016, 12:58 pm

      Generally speaking you don’t want to be too passive or too active in the markets

      • Mystic March 10, 2016, 2:58 pm

        Dave, with passive i meant that set the portfolio, and balance it every quarter. Review and question the strategy ones a year to see if it is congruent with overall life plan. thanks for your insight.

  • David March 11, 2016, 2:41 pm

    Don’t forget to mention the first $47,000 in income from long term capital gains and dividends is taxed at 0% if you are using the standard deduction. Pretty neat.

  • Doug March 12, 2016, 7:56 am

    I don’t get it, what’s so scary about the stock market? It seems odd to me that a lot of people will line up outside a store in the cold, before it opens, on Black Friday or Boxing Day in Canada, to get in first to scoop up great deals, but not show similar enthusiasm when stocks, ETFs, or REITs go on sale. I don’t get it and never will.

    It was 3 years ago from now, if my memory serves me correctly, that there was another article here about the stock market. I’ll repeat the same thing I said back then. Picture an engine with a governor. If extra load is picked up and the speed drops below the desired setting, the governor reacts by giving it more fuel/air mixture which, when it burns, pushes down on the pistons with greater force. That translates to more torque and horsepower being transferred to the crankshaft to pull the speed up to the desired value. Similarly, if the load drops off and the speed goes up, the governor reduces the amount of fuel/air mixture and the speed drops. It’s so ridiculously simple, a teenager can understand it quite easily. I don’t know why investors don’t work in a similar manner, buying more stocks, ETFs, REITs, or othe investments when they are on sale and less or none when they get expensive. Between this time of year in 2009 and now, there have been some SPECTACULAR Black Friday/Boxing Day sales on various assets. If you had the money on hand and didn’t take advantage of these sales, you have no one to blame but yourself.

  • Laura March 13, 2016, 8:10 pm

    found your blog a few weeks ago via the New Yorker article and have been slowly making my way through your posts. We’re pretty good savers, but I have been inspired to go ultra-Mustache! I really had to learn to cut back when I quit my job after my son was born, which basically halved our income. Our family of 3 was living on about $3000/month, but we weren’t saving much of anything. Luckily that only lasted 9 months, and I’m now working part-time. Because we had cut back so much and were used to it, we’re saving almost everything that I earn. We’re lucky that we were (and are) in a very stable financial situation, with pretty good (though not ‘stache level) retirement funds and savings, no debt, just a mortgage. Since finding your blog I’ve been inspired to up our investing and reduce the amount of money languishing in low-yield savings accounts. We’re going to refinance our mortgage to a 15-year term, and (seems small after the other cost-cutting measures) get a new cell phone plan.

    Anyway, all that to say, I’ve been nodding my head and saying “yes!” in agreement every time I read one of your posts on investing in index funds and not letting the ups and downs of the market bother you. I highly recommend the book Intuition: Its Powers and Perils by David G. Myers. It has chapters on housing (a house you’re going to live in is generally not a good “investment” since its value increases on par with inflation), the stock market (invest your money in index funds and then ignore it to get the highest yields), and our flawed perception of risk. It basically completely changed my outlook on investing. Mostly I loved that the author notes that statistically, women see higher yields on their retirement funds since they don’t try to actively manage them, while men track them constantly, get nervous when they see a dip, and try to beat the market by selling and buying.

  • Qmavam March 14, 2016, 1:49 pm

    I read a lot of negativity on the market here, must be time to put money in.
    On Feb 10, My Market Guru said market conditions are right to invest new money.

    • Doug March 14, 2016, 3:53 pm

      You’re probably right, but there were even better deals in the stock market late last year and early this year.

    • Greg January 10, 2017, 7:53 pm

      Hope you went with your gut, Qmavam… markets are up about 17% and counting since you posted!


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