Just Keep Buying

Read in December 2023 and January 2024

0. Savings and Investing #

expected saving = money you can easily save in a year
expected return = money you expect to get from existing investment

if (expected_saving > expected_return)
	You are 'poor', focus on saving more
else
	You are 'rich', focus on investing

1. Saving #

1.1 How much to save? #

Save more when you can, less when you can’t

Income won’t be stable over the lifetime
People with different income levels can’t save at the same rate: high income usually translate to higher savings rate

1.2 How to save more? #

Since Saving = income - spending: a. Control spending b. Grow income

Control spending

Spending usually don’t increase by the same proportion of increase in income: diminished marginal utility
Cutting spending is rarely what drives people out of poverty

Grow income

Usually more effective than control spendings
It is easier to save more when income is higher

1.2.1 How to grow income? #

Income is grown by converting human capital into financial capital

Sell time/expertise: easy to start, doesn’t scale
Sell skill/service: better than 1, still hard to scale
Teach: tough competition, easy to scale
Sell a product: high initial investment, easy to scale
Corporate laddering; most common, gain skills/experience in exchange of control over time and what to do
Acquire more income producing assets: ultimate goal, 1 - 5 are all temporary in order to do 6

1.2.2 How to spending responsibly? #

Responsible spending brings contentment without guilt 1.2.2.1: 2X Rule:

Invest the same amount we splurge in income producing asset 1.2.2.2: Fulfillment maximization:

Money is a tool to create the life we want, spend on things that get us closer to what we want in life
- What things do you care about?
- What situations do you want to avoid?
- What values do you want to promote?
Align spending with our long-term fulfillment:
- if (algined AND canAfford) go for it
- if (notAligned OR cannotAfford) forget and move on 1.2.2.3: Find what works for you
It’s your money. Find what works for you personally 1.2.2.4: Lifestyle creep Increased spending after increase in income to keep up with peers
Aim for <= 50% of the raise, less if income is higher

1.3 What of debt? #

Debt is not always bad.

1.3.1 When to take debt? #

To reduce risk: debt provides liquidity, decreases uncertainty
To generate return higher than the cost of borrowing

1.3.2 Calculate debt’s worthiness #

Discount future income stream as a result of debt by 4%/year (roughly 50% over 40 years)
Subtract opportunity cost
Subtract cost of debt
Subtract taxes

1.3.3 Other costs of debt #

Stress and emotional cost: exactly how much depends on individual

1.3.3 Debt as a choice #

Debt is usually more effective for those who can choose when/if to take it
- Not an option for many people

1.4 Home #

1.4.1 Cost of home ownership #

1.4.1.1 One time cost #

Down payment: 3.5% - 20%
Closing fees: 2% - 5%
Commissions: 3% Total cost: 5.5% - 31% of home value. It only makes sense if living in it long term. Transaction fees easily eats away appreciations.

1.4.1.2 Ongoing cost #

Upkeep: 1% - 2%
Cost of time Total cost: ~2% of home value per year. Expense of home ownership is more volatile than renting over the short term.

1.4.2 Cost of renting #

Rent
Long term risks
1. Future housing costs
2. Instability of living condition
3. Ongoing moving cost

1.4.3 Home as investment #

From 1915 - 2015, U.S homes appreciates 0.6%/year after adjusting for inflation
Opportunity cost of investing in home is usually far higher than its return over the long term: Home is not a incoming producing asset
Home value is far less volatile than most other asset class

1.4.4 When to buy a home #

Plan to live there for at least 10 years
Stable professional and personal life
Can afford it: >= 20% down payment AND mortgage/income < 43%

1.5 How to saving for big purchases (e.g home) #

It depends on the time horizon: longer time horizon increases risks of cash, decreases risks of bond due to inflations

if (horizon <= 2 years) 
	Cash is king
else if (horizon > 2 years AND horizon < 5 years)
	Bond over cash
else if (horizon > 5 years)
	Consider a mix of bond + stock

1.6 Save for retirement #

1.6.1 The 4% Rule #

A point where you can withdraw 4% of a 50/50 stock/bond portfolio for at least 30 years: Total saving required = 25 x Annual spending of first year in retirement (if spending is constant)

1.6.2 Spending is not a constant #

Data suggests spending usually decrease in retirement by about 1%/year
- Lower needs for new clothing, services, transportations
- Mortgage is usually paid off

1.6.3 The cross over point rule #

A point where investment income > expense

Total saving required = expense / return rate ~= 4% rule result

1.6.4 Retirement is more than just money #

Finance is usually not the chief problem for retirees
Fulfillment in retirement and health conditions (mental + physical) usually turn out to be the more important issues
Money is a tool that solves a lot of problems, but it won’t solve the problem of your being

2. Investing #

Investing is for our future selves
Investing is a hedge against inflations: $1 deprecate by 50% over 35 years at 2% CPI
Investing is turning diminishing human capital into financial capital

Human capital = All future earnings discounted by a discount rate (1-3%)

2.1 Invest in what? #

Many paths, no singular answer

2.1.1 Stocks #

Represents ownership in businesses
One of the best reliable ways to create wealth in the long term

Pros

No ongoing up keeps
Historically good income generation over the long term

Cons

Highly volatile

How

Buy individual stocks
ETFs or index funds (recommended, cheap, easy, handsfree diversifications)

2.1.2 Bonds #

Pros

Tends to rise when risky assets fall
Consistent income generation

Cons

Much lower return

How

Buy individual bond
ETFs or index funds (recommended, cheap, easy, handsfree diversifications)

2.1.3 Properties #

Pros

Tangible
Usually does not crash in value
Historically steady appreciation

Cons

It is an asset as well as a liability
Require on going maintenance
Hard to diversity
Low liquidity

How

Direct negotiations
Through agents

2.1.4 Real estate invest trust (REIT) #

Pros

Stock-like return
Low correlation to stock

Cons

Equal or greater volatility than stocks

2.1.5 Farmlands #

Pros

Competitive compound return (7% - 9%) if well managed
Low correlation to other assets

Cons

Low liquidity
Requires ongoing upkeep

How

Direct buying
Through REIT

2.1.6 Angel investing #

Pros

High return (20% - 25%) Cons
Most will lose
Huge time commitment
It’s more of a profession

2.1.7 Royalties #

Pros

Steady income (5% - 20%)
Low correlation to other assets

Cons

High fees
Tastes are hard to predict

How

Buy individual stocks
ETFs or index funds (recommended, cheap, easy, handsfree diversifications)

2.1.8 Your own products #

Books, services, information, etc

Pros

Ownership
Potentially high return

Cons

Huge initial investment, no return guarantee

2.1.9 Gold, crypto, arts, etc #

Values are based solely on perceptions
Have no reliable income streams
They are non-incoming generating assets
Recommend make up < 10% of total investment portfolio

2.2 On buying individual stocks #

Only do it for fun. Put in what you are willing to lose Why?

75% professionally managed funds don’t beat market benchmark
Insanely high volatility, emotional + time cost

2.3 How soon should you invest? #

Now: Most stock markets go up most of the time

2.3.1 Timing the market #

Appealing in theory, difficult to practice
Historically average-in underperforms all-in by 4%/year
- Average-in only over performs during crashes, crashes are pretty rare
- 60/40 all-in beats 100 average-in with the same risks: diversify by asset types instead of time

2.4 Never wait for the dip #

Historically buying the dip under performs most of the time anyway
You can’t predict the dip

2.5 Luck #

2.5.1 When you were born #

There are good decades, there are bad decades
Our birth time will shape what kind of return we can get regardless of investment strategy
The act of investing itself is to mitigate against potential bad luck

2.5.2 The end is more important #

Bad returns at the end of the time horizon is worse than bad returns at the beginning
Personally 2055 - 2065 is the most important for me

2.5.3 Mitigate bad luck #

Adequate diversification depending on time horizon
Lower withdraw during downturn
Supplement income by working part time
Time is the best way of mitigating against bad luck

2.6 Volatility #

Volatilities are like ocean waves, you won’t get to the new world if you can’t stomach it.
Volatility is the admission fee of success
Stock will decline an average of 10.6% in any given year at some point
If max draw down > 15% for the year, it’s better to invest in bonds. But max draw down is impossible to know

2.6.1 What can we do? #

Diversify
Accept volatility

2.7 During a crisis #

If have investable cash on hand, crisis is the best time to invest. It takes more percentage growth to offset the same loss in dollar term.

2.8 When to sell #

a. To rebalance b. Get out of concentrated (or losing) positions c. To meet financial needs

2.8.1 Sell right away vs over time #

Sell as late as possible: let money work in the market for as long as possible
Buy quickly, sell slowly

2.8.a To rebalance #

Without rebalancing, portfolio asset mix will drift

Usually stock outperforms bond in the long term
Rebalancing usually reduces return but also reduces risks

How often to rebalance

No perfect time, but start with annually: easy, save time, tax season

Better way to rebalance

Don’t sell, buy more instead
- It reduces max drawn down compared to sell to rebalance
Becomes harder when portfolio is large

2.8.b Get out of concentrated (or losing) positions #

Concentrated positions is likely to underperform the market in the long term. Avg stock return 6.6% vs 9.9% of S.P500
Don’t sell all at once (Tax!!)
Sell based on a pre-defined rule and stick to it no matter what

2.8.c To meet financial needs #

Fund the life you need before risk it for the life you want

2.9 Where you should invest #

2.9.1 Roth vs pre-tax #

if tax_rate_before == tax_rate_after
	does not matter at all
if tax_rate_before > tax_rate_after
	go pre-tax
if tax_rate_before < tax_rate_after
	go roth
if not sure
	why not go both?

2.9.2 Benefits of retirement accounts #

Shelters you from capital gain tax
Not much difference to a taxable account if you are disciplined to not trade in/out frequently

2.9.3 When not to maximize 401k #

Always get all your employer match, it’s free money
If your 401k has high fees (>= 0.83%), the fee could offset all tax advantages
401k is effectively inaccessible for the majority of our life time

2.9.4 Asset organization #

Theoretically: put high growth/risk assets in non-taxable account, low return/risk asset into taxable account
- It makes rebalancing harder
- Time consuming
In reality, just forget it