Recently, I had the privilege of getting an advance copy of Nick Maggiulli’s first book: “Just Keep Buying.”
Nick is the Chief Operating Officer at Ritholtz Wealth Management, though you probably know him by his super blog Of Dollars and Data. In a world of superficial material, Nick’s writing is one of few I religiously follow.
“Just Keep Buying” was so good, I finished it within a day.
Here are 12 of the most important lessons I learned from reading it:
1. Focus On Saving or Investing? Depends on How Much Money You’re Making
At the beginning of your career, you should focus on being able to save more money.
If you’re only able to invest $1,200 a year (i.e. $100 a month), even making superstar-level returns of 20% isn’t gonna bring you financial freedom.
Much better to increase your income — which allows you to save and invest more.
As your investment assets grow, you can start focusing more on investment decisions.
For example, someone with $1 million (at 5% returns, that’s earnings of $50,000 a year) needs to think more about their investments than someone with $10,000 (at 5% returns, earnings of $500).
“Saving is for the poor, investing is for the rich.”
2. Which Is More Important? Cutting Expenses or Increasing Income?
Assuming you don’t suddenly inherit a million bucks, there’s only two ways to increase your savings: cut expenses or increase income.
Cutting expenses is easier, but you quickly reach a limit of how much you can cut.
In the USA, the bottom 20% already don’t make enough to cover basic necessities like housing and food. That’s a first world country, mind you.
It’s harder to increase your income, but if you want to get to financial security, that’s critical. Some ideas to increase income: side gigs (e.g. selling your services online), promotions, or getting a higher-paying job.
Is increasing income really so powerful? Research has undeniably shown that households who earn more save more.
Why? Nick explains diminishing marginal utility using the humorous Law of the Stomach. (Read the book — won’t spoil it for you here.)
What about stories of people who earn a lot but blow it all? Those are actually outliers.
The biggest lie in personal finance is it’s all about cutting your spending. Sure, review your expenses, but maybe there’s no need to ditch the lattes.
My wife is gonna love this book.
3. How To Spend Money Guilt-Free
Use the 2x Rule:
For every dollar that I splurge, I have to spend an equivalent amount on investing. Or charity.
Maximize fulfilment (not merely short-term happiness) — which is of course different depending on your personality and interests.
There’s no one-size-fits-all strategy. The best way to spend money is what works for you.
4. How Much Lifestyle Creep Is Okay?
Nick doesn’t believe in eliminating lifestyle creep. That’s not realistic.
But how much of your income raises can you safely splurge on? Is it 75%? 25%?
For most people, 50% is okay. Once you start spending more than 50% of your raises, you start delaying retirement.
The math is complicated (though explained well in the book), but if you want a quick and easy way to enjoy your raises without delaying retirement — just remember this:
Save 50% of the raise, spend 50%.
5. Retirement and the 4% Rule
Financial advisor William Bengen introduced the 4% Rule as a guide for how much retirees can withdraw from their assets, and have the money last at least 30 years.
For example, someone with a portfolio of $1 million can withdraw $40,000 (4%) in their first year of retirement, $41,200 (+3% to cover for inflation), and so on.
The inverse of the 4% Rule is also used (frequently by the Financial Independence Retire Early, FIRE community) to calculate how much money you need to retire. Which is:
Amount needed to retire = 25 x Annual expenses
So if I currently live on $60,000 a year, I need (25 x $60,000), $1.5 million to retire.
In Today’s Environment, Is the 4% Rule Still Applicable?
The 4% Rule was introduced in 1994. Today, many question if it still works.
Nick says the 4% Rule is still sound. In most cases, following the 4% Rule actually 5x-ed people’s retirement portfolios.
Why? Research shows you actually spend less money — instead of increasing it by 3% every year — when you retire.
For many people, retirement is more an existential crisis (“What will I do with my time? What is my life’s purpose?”) than not having enough money.
“Though money can solve many of your problems, it won’t solve all of your problems.”
6. Why Invest? What To Invest In?
There are many reasons to invest, but the compelling one for me was realizing my abilities won’t last forever. They’re eventually gonna fade, so I’d better convert them into financial assets to keep me healthy after I’m weak.
All thing being equal, stocks are historically the best place to invest your money. The U.S. stock market is undefeatable here.
This doesn’t mean you should put ALL your money into stocks. Balance the volatility of stocks with bonds to cover for bad times.
There’s no material difference between buying bonds, and buying bond funds.
p.s. Research has shown mortgage debt (i.e. home loans) doesn’t cause stress like other types of debt (e.g. credit cards.)
7. Two Reasons Why You Shouldn’t Pick Individual Stocks
The financial argument: Most professional money managers can’t beat the index. What makes you think you can? Just 4% of stocks (from 1926-2016) created excess returns vs boring U.S. Treasury Bills.
Historical tells us even leading companies don’t last very long. At one point, ExxonMobil was the largest public company in the world. I was so proud I had friends who worked for them. Today, I’m not surprised if many of you aren’t even sure what ExxonMobil does.
I’m sure you know Apple though. And although it might feel like Apple will be around forever, we know one day Apple might not even be a top 10 company.
The existential argument: How do you conclusively know if you’re a good stock picker? Maybe you just got lucky? It’s not a direct feedback loop like say basketball — where you can quickly tell whether someone belongs in the big leagues.
And even if you do well today but crash five years from now, how do you know if you just hit a rough patch or genuinely suck? For most people, individual stock picking is too convoluted between luck and skill.
The simple, practical alternative to picking stocks: Invest in index funds and ETFs.
8. When Should You Invest?
“Most markets go up most of the time.”
“Buy low, sell high” sounds simple, but in reality, timing the market is extremely hard.
Historical data shows “buy now” works better than “buy in over 12 months.” Even when cyclically-adjusted price-to-earnings (CAPE) ratios are high.
Besides, if you’re not investing today, what makes you think you’ll buy in when the market crashes? I’ve said that to myself countless times, but I know it’s super hard to do. Emotions get in the way: “So scary to buy now. Let’s wait a little longer…”
Don’t wait to buy the dip. Even perfect timing can’t beat time in the market.
Refer article: Even God Couldn’t Beat Dollar-Cost Averaging
9. Luck Matters A LOT in Life
Even legendary authors Stephen King and J.K. Rowling struggled when they wrote books using undercover names.
Sequence risk is the risk of bad timing: the markets crashing just as you start retirement.
Unfortunately, negative returns towards the end of your career will affect you the most. Because that’s when you have the most money invested. (Read the book for mathematical proof and some glorious graphs.)
For someone like me, born in 1984, and assuming I retire at at 50 — the decade starting 2030 is critical.
While you can’t do anything about bad luck, there are things you can do to defend against it: Diversify your investments, and have more lower-risk assets as you get older.
10. How To Deal With Market Crashes
Just keep buying.
Buying when there’s blood in the streets allows your money to grow the most.
There’s a common financial table which shows how much you need your assets to recover to break even. For example:
- A 20% loss needs a 25% gain
- A 50% loss needs a 100% gain
Normally, this table is shared to remind you how badly losses hurt. To remind you to be careful.
But reframe your thoughts, and it can also help you deal with fear.
For example: if a market crashes by 50%, and you expect it to recover completely within 2 years — that’s a 100% gain (or 41.5% annual returns). Nice.
Historical data from 39 developed countries (over 30 years) showed an 88% chance stock markets continue to go up. There’re no guarantees in life, but those are good odds.
11. When To Sell Your Assets?
The most difficult question ever. Because it forces you to fight between:
- “What if I sell now, but the price goes up?”
- “What if I don’t sell, and then the price crashes?”
Take your emotions out, by creating a framework before you need to sell. For example, Nick recommends only ever selling to:
- Rebalance your portfolio
- Get out of a losing position
- Meet some immediate financial need
“Buy quickly, sell slowly.”
Rebalancing is good because it reduces risk. In terms of how often, there’s no clear answer, but Nick recommends annual rebalancing.
You can rebalance by buying more of other assets, instead of just selling your best-performing ones.
12. The Real Purpose of Investing
To live a life you wanna live.
Money dominates our thoughts, but time is actually your most important asset.
If you’ve already won the game, take your money off the table.
Taxes in USA are crazy. Am glad that tax rules in Malaysia (where I live) are much simpler.
You will never feel rich. The “I don’t have enough” feeling never goes away.
The trick is to not forget all the people looking up at you, wishing for the life you already have today.
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Thanks Nick for the book — I hope to get it signed one day!