Simple Investing Simple Living

Robinhood is a discount brokerage service that has become increasingly popular.  They were founded in 2013 and quickly have revolutionized the financial services industry. They have millions of customers who are first time investors with many being within the millennial age group.

Robinhood gained notoriety by offering commission free stock trades and a crypto currency (bitcoin) trading platform.  It is often quoted that they have democratized investing for small investors.  This forced other large brokerage services such as Charles Schwab and Fidelity to follow suit in offering commission free stock trading as well.  On the surface this may seem like a positive, but I have a different view.

It is a good thing that millions of younger people have started investing, but I think trading stocks and crypto currency is the wrong approach.  This has the potential to do more harm than good; this approach has increased likelihood of causing losses causing the new investor to believe investing overall is too risky.

Warren Buffett stated that the best investing book he has ever read is The Intelligent Investor byBenjamin Graham.  Mr. Graham was his teacher at Columbia Business School and was also the co-authorof a book titled Security Analysis with David Dodd which has been used as a textbook in finance classes.  The title of the second book should cause one to pause before purchasing individual stocks.  Security analysis is the research necessary to place a value on a business.  Think about that for a moment- are most retail investors trained in finance and accounting?  The depth of knowledge necessary to place a value on a large company in the United States is beyond most people’s abilities.  One would have to understand so many different aspects of a business including but not limited to corporate accounting, understanding SEC (Security and Exchange Commission) documents, real estate valuation, product sourcing, management capabilities, competition, industry trends, etc.  All of this information and more is necessary because when purchasing a stock, you are in affect buying a business that you think will produce more income and grow.  This leads to another problem for the average investor- not only do you have to understand security analysis, but you have to constantly be aware of industry changes within your individual stock holdings. This alone is a full-time job for money managers. What may surprise many is even professional money managers who are trained in finance and purchase securities (stocks) for a living fail the majority of the time to outperform a simple stock market index.  Studies showing this are within the website under the investing section.

Mr. Buffett is often quoted that he does not know what the market will do today, tomorrow, next week, next month or next year. After he does proper valuation estimation and decides to purchase a stock, it is not for the intention of trading.  He does not trade.  He approaches it as owning a good business for the long-term and not as a trading vehicle.  Mr. Buffett takes into account the dividends he will be paid each year along with any retained earnings that help grow the business. Over time, this typically increases the value of the business and many times the stock price.  The short-term market volatility and price swings mean nothing if he believes the business is profitable for the long-term.  Mr. Buffett has stated on many occasions that most investors should stick to purchasing a broad based low cost stock market index and that he knows of very few people within his lifetime that have had the skills to outperform the stock market index.

Crypto currency speculation is another area where there have been wide swings in price.  This is an example of an investment where one is purely guessing whether the price will go up or down.  There are no dividends or retained earnings.  It is similar to betting black or red in roulette.  This is not an investment; it is just a bet.  This is a service being offered that is incredibly risky to the small retail investor.

The original Robin Hood may have taken from the rich to give to the poor but the modern day Robinhood is misguided if they think they are helping the small investor with these services. 

The fundamentals of good investing do not really change.  They involve disciplined saving, investing for the long-term, investing in low-cost broad based index funds and getting on with your life.  One of the most important things an investor can understand is their own limited capabilities.  So, instead of following the latest trends, take the time to self-educate on investing through sources like The Intelligent Investor (first published in 1949) and many other books written by authors who have no profit motive of what you do with your investments.  Some of my favorites are listed within the recommended resources section of my website. 

Many people find investing and personal finance confusing and many more find it flat out boring, so when someone becomes well-known for their expertise in these subjects and is able to gain a large audience through television, radio, podcasts, or books, it is a good thing.  They help many people understand these topics through entertaining presentations.  There are many that give excellent advice but unfortunately there are areas where they do not. 

Dave Ramsey has done more for educating the masses on personal finance than anyone I am aware of in my lifetime.  He has personally changed the paradigm of how millions view debt.  I would recommend Mr. Ramsey’s program to anyone interested in improving their personal finance situation and more specifically paying off debt.  Over the years Mr. Ramsey has expanded into other areas including taxes, accounting, real estate, insurance and investing.  Investing is the only area that I have different views and think there are better ways for one to invest.  Mr. Ramsey prescribes in his words, “good growth stock mutual funds” as the base of his investing advice.  These are typically managed mutual funds that he promotes through a group of advisors that are found through his website.  There are two problems with this: managed funds and financial advisor’s fees.  There is literally reams of data that show low-cost passively managed index funds outperform most managed funds and that fees are one of the largest detriments to your investment returns. 

Jim Cramer from CNBC seems like an intelligent and earnest guy who wants to help people.  I have watched his program on and off over the years and have enjoyed listening to the many interviews he has done with CEOs of major companies and learning about new products and processes.  His program though is based on the premise of owing individual stocks and he proposes that the average person is capably of doing this.  This is where I disagree.  In Mr. Cramer’s defense, he has come to the realization that most of an investor’s investments should be held in an index mutual fund, but he still promotes using a small part of your investments to buy individual stocks.  This is the equivalent of going to a casino based on the studies that I have read done by a long list of esteemed academics including a fair number of Nobel prize winners in economics.  Most people including professional money managers have little chance of outperforming a low-cost market based index fund.

Ric Edelman is a nationally known radio host, author, and founder of a large financial advisory firm. He does a wonderful job advising people on how to look at their money in the context of their life and I have enjoyed several of his books.  Mr. Edelman, like Mr. Cramer, did eventually come around to the advantages of index investing but due to his inherent bias of selling financial advice, he suggests an advisor along with a portfolio that is far more complicated than it needs to be, along with investing in commodities.  Most academic research shows that simple portfolios can outperform more complex portfolios and that commodity investing is similar to investing in individual stocks (difficult to outperform index funds).

Bob Brinker, a nationally syndicated radio host, is an incredibly intelligent person.  I have gained a lot of useful information from his program.  Mr. Brinker’s biggest attribute is his prescribing of self-education to his listeners and callers. He believes you should thoroughly understand what you are investing in.  Concerns I have with Mr. Brinker include his belief in managed funds and trying to time the market.  Both of these techniques have been proven through studies to be incredibly difficult if not bordering on impossible. 

Money Magazine, Kiplinger’s Finance, CNBC, Bloomberg, Fox Business all promote purchasing individual stocks.  The magazines will promote stocks to buy now, stocks to buy in a recession or which stocks performed best last year.  The television networks have guests on daily that suggest stocks to own or they have two guests on with opposing viewpoints of what to own.  None of this advice is helpful or for that matter will increase your investment returns.

All of these people have one in thing in common- they all profit from their advice in one way or another.  This is not inherently bad; you just need to realize where they are coming from.  Mr. Ramsey receives compensation through advertising and his advisors.  Mr. Cramer receives compensation through CNBC which sells advertising for his show.  Mr. Edelman receives compensation through his firm and advertising.  Mr. Brinker sells a newsletter on his show along with advertising.  The magazines and television networks are sponsored by financial advisory companies, publicly traded companies, brokerage houses, etc.  Employees of these companies are frequent guests brought on for their so-called expertise.      

This is what can make investing so confusing; you have mostly good advice mixed in with some that is not.  And unfortunately, the bad advice is what could cost you the most based on a lifetime of saving and investing.  Just 2% in lower returns and/or fees over your working life could lower your savings total by more than half.  Do not let this happen to you.

There are no easy solutions to most things in life including learning about investing.  I may not be able to make the subject any less boring for you, but once you have some knowledge the process is incredibly simple.  Check out the investing section of my website for some basic information to get started and the recommended resources section for information on investing from people who are not selling anything.

I’m guilty of talking about money too much.  My wife reminds me on a regular basis to tone it down, especially around our children.  Unfortunately, I have a hard time not discussing it whether it’s about the price of something or investing; it’s an interesting topic to me. 

The other day I read an article that stated that people who talk about money all the time sound cheap.  It made me start to think about how people perceive me, and whether they think I’m cheap or frugal (as I prefer to describe myself). So, of course, I looked online to see what other people thought and for the most part, it came down to this.  The prevailing opinion online is that cheap simply looks at price only whereas frugal is more concerned about the best value regardless of price.  I’d like to think frugal fits me pretty well.

After working for many years and investing through market ups and downs, I think that I just have a healthy respect for the money that we’ve earned and saved.  It hasn’t always been easy and with age and experience you begin to understand it took a lifetime of work and discipline to achieve financial freedom.  So, when we’re going to purchase something I pay attention to what we are getting for our money.  

I try my best to not be manipulated by marketing and cultural norms on how money is spent.  This seems more like behavioral psychology to me than whether a person is cheap or frugal.  I just don’t understand many of today’s purchases that are considered “normal”.  This would include coffee, craft beer, eating out, new vehicles, etc.  They just don’t resonate with me or provide value in spite of their popularity with the rest of society.  I wouldn’t hesitate to enjoy any of them and spend the money if they provided value to me.  This is probably where I’m most at risk at looking or sounding cheap. 

My wife and I have set up a budget by category that I think we would both agree is pretty generous on spending for both of us.  We’re certainly not deprived and generally we both come in under the budgeted amount.  Interestingly it doesn’t matter to me where the money is spent during the year, the only time I get a little concerned is when I see the totals approaching our budgeted amount.  I think this is due to my concern for our long-term welfare as well as not being a burden on our children or others financially.

Money to me is simply a tool to achieve some of your goals.  Everyone has different goals and values and how they choose to spend their money.  My monetary goals at this point are few and very simple. They just don’t involve many purchases that our visible to other people.   

After giving it some thought, I’m comfortable with how I handle money, but my wife has a point- I can give the constant evaluation of prices a verbal break.  Maybe you can teach an old dog new tricks.      

According to www.investopedia.com opportunity cost is defined as the benefit that is missed or given up when an investor, individual or business chooses one alternative over another.  Put another way, Peter Drucker the well-known management expert says, “everything in life is a trade-off.”  From a financial perspective, David Bach author of The Automatic Millionaire became famous for saying, “a latte a day keeps retirement away.”  He was equally criticized by many who would say that life is too short to give up their simple pleasures, but I think Mr. Bach has a point.

I was watching a YouTube video the other night about living off the grid on a sailboat.  The host of the video was describing how he was able to chase his dreams by saving a ton of money in his twenties and thirties and quitting full-time work at age 36.  He has been sailing around the world for the past 30 years.  He gave an example of saving a small amount that I hadn’t heard before.  Simply save $1.00 on every meal that you eat.  Whether you eat at home or eat out, just cut the total by $1.00 every time.  That’s $3.00 everyday which equals $90.00 per month.  Taken a step further, if you save $90.00 every month and invest in the stock market for 30 years at a historical return of 10% your total would be $187,000.00.  That’s $187,000.00 by simply planning your meals a little better, by not ordering a soft drink, by eating healthier (fruits and vegetables are cheaper) or by choosing a less expensive entrée occasionally.  This doesn’t really seem like you’re giving up much at all other than maybe a few minutes thinking each week about your meal plan.   

Think about how many things in life this could be applied to.  Not just David Bach’s latte, but it could apply to where you choose to buy gas (price), where you park (free or metered), where you shop for groceries, happy hour (less expensive drink), etc.  I’m not advocating that you need to apply all these things to your life; all you need to do is pick one or two to achieve a sizable amount of savings.  This doesn’t seem like deprivation to me and seems pretty easy to apply to everyday life.

Another potential missed opportunity cost may be where you choose to invest that savings.  Say you were to leave that $3.00 per day in a local bank savings account.  The historical return on cash is around 3% which after 30 years would yield a total of $52,000.00.  That’s a difference of $135,000.00 in lost returns just by where you choose to invest.

Getting back to the YouTube video, the host went on to say that his personal freedom was worth far more to him than having lived a slightly expanded lifestyle at the time.  Now he is living the ultimate expanded lifestyle sailing around the world with his significant other for most of his adult life.  That’s a trade-off that resonates with me. 

So, what’s your goal?  Are you missing out on your own personal opportunity costs?  Are you coasting along on automatic pilot?  Are you saving enough, or do you maybe need to consider some small changes to amp up your long-term savings?  Don’t miss out on your own life opportunities by not controlling your costs today.  Once again, it’s simple living and simple investing.

One of the reasons I started this website was to help people regarding personal finance and investing.  One misconception that is popularized by politicians and reinforced by media is that it’s impossible to become wealthy, that the deck is stacked against the little guy.  In my view, this couldn’t be further from the truth.

The following table shows investing returns starting with $1 in your account at a historical stock market return of 10% over a 40 year working career.

Savings Per month                           Total

$50.00                                                   $277,562.67

$100.00                                                 $555,080.67

$200.00                                                 $1,110,114.89

$300.00                                                 $1,665,149.70

$400.00                                                 $2,220,184.52

$500.00                                                 $2,775,219.33

Now let’s take a look at the latest data on Net Worth in the United States.  The following is from the 2016 Federal Reserve Study of Consumer Finances broken down by percentile.  This is a study done by our central banking system every three years.  This shows what Americans are worth by adding up their assets and subtracting their liabilities. 

Net Worth Percentile                     Net Worth

10%                                                        -$962.66

20%                                                        $4,798.06

30%                                                        $18,753.84

40%                                                        $49,132.21

50%                                                        $97,225.55

60%                                                        $169,550.64

70%                                                        $279,594.27

80%                                                        $499,263.50

90%                                                        $1,182,390.36

So, if you can manage to save just $100.00 per month it would put you ahead of 80% of all Americans.  This probably is a surprise to many people.  One has a high probability of achieving this by simply investing in a low-cost total stock market index fund and staying the course, in other words by not selling out and continuing to save every month through the good and bad of market volatility.  It really is that simple.  Better yet, invest the money within a retirement plan and either have taxes deferred in a tradition individual retirement account (IRA) or no taxes at all on the gains with a Roth IRA. 

Another tax advantage that many people don’t realize is when you invest with the total stock market index in a non-retirement account you don’t pay taxes on unrealized gains, meaning you aren’t taxed on appreciation until you sell the fund.  Unfortunately, you are taxed each year on dividends paid to you, but the non-taxation of unrealized gains is still a great deal.  This is available to anyone regardless of their wealth and is an incredible advantage in building wealth.  Currently tax law even favors low-income earners.  If you sell the funds in your non-retirement account and are in the lowest two tax brackets you pay no tax on capital gains.

Investing in the total stock market index can done through a variety of companies including Vanguard, Schwab, Fidelity, and many others.  Currently Schwab doesn’t even have a minimum investment. 

Further research shows that the average millionaire is well, average.  In Chris Hogan’s book Everyday Millionaires, Mr. Hogan shows through surveys of over 10,000 millionaires that most of them work common jobs at average salaries.  This was also shown over 20 years ago in Thomas Stanley and William Danko’s book The Millionaire Next Door.  They saved and invested and didn’t buy into the consumer culture.  They invest simply and live simply and are very satisfied with their lives.

So, what are you waiting for?  Build your net worth and expand your opportunities.   

If the only two things you ever read on personal finance and investing were The Total Money Makeover by Dave Ramsey and The Little Book on Common Sense Investing by John Bogle, you would be ahead of 90% of the general public in financial knowledge.  More importantly, if you followed the advice in these two books you would be ahead of 90% of the general public in net worth.  It really is that simple and both of these books are short and easy to understand. 

Let’s start with The Total Money Makeover.  It is focused on budgeting, living within your means, and erasing debt from your life.  Mr. Ramsey does a good job of showing examples of how our behaviors affect us negatively and then how to do things correctly.  He gives concrete examples of how much to save, how debt affects you, and personal examples from people who have followed his advice and turned their financial lives around.  In my view this book tells the truth about personal finance rather than how our culture currently tries to tell us what is important.  The only part of this book that I think can be done better than what Mr. Ramsey prescribes is the investing section which is why I recommend the following book.

The Little Book of Common Sense Investing is a concise book that shows simply how markets work and how you can receive the same returns as American businesses earn in aggregate by investing in low cost index mutual funds like the total stock market index.  Taken a step further, Mr. Bogle lays out the evidence showing how active investing (actively managed mutual funds or advisors picking mutual funds) clearly underperforms owning a broad-based low-cost index fund.  He goes on to show that market returns long-term are not speculative at all but simply reflect the earnings of business.  You share in those earnings when you own the total stock market index.

Most people don’t enjoy dealing with personal finance or investing whereas I find it to be incredibly interesting.  I have read hundreds of books over the years regarding these topics and although I pick up something new in almost anything that I read, it still boils down to just the core topics of these two books.  I would certainly encourage you to read as much as possible on any topic that will better your life, but I also understand the reality of most people’s lives.  That’s why I am suggesting just two short books.  You will achieve financial abundance but more importantly many personal options within your life.  Invest simply and live simply.

If I could start over in my adult life, I would save at least 25% of my income and invest in a low-cost total stock market index fund.  This would not only have increased my financial returns but more importantly it would have increased my personal returns.  Let me explain.

Throughout the years I have spent an inordinate amount of time trying to produce income.  There were multiple business ventures that failed along with multiple real estate purchases that didn’t produce any real income. In my sales career I was constantly expanding my product lines as a way to increase my income as well. The problem with all of these methods isn’t the failures but the time spent failing.  This time could have been spent on my family and our well-being.  Don’t get me wrong, I don’t think I neglected my responsibilities to my family but now that I understand how compounding market returns work, I just didn’t need to do all this stuff.  I could have been more thoughtful and intentional about how I spent my time.  I know this for sure- I would have been less stressed, healthier and more involved.  My lovely wife has been so patient with me over the years with the amount of time I have devoted to working. We have built a nice life, but it could have been done much easier.  I spent too many years like a pinball just bouncing around from one idea to another rather than taking time to evaluate things more thoroughly.  I really enjoy business and I’m sure that I still would have owned a business, but it would have been more thoughtful and in tune with the rest of my life, especially in my younger years.

We were married in 1983 and the US Stock Market has returned over 11% annually since that year and historically returns at around 10%.  Hypothetically, if one had saved $500 a month for 36 years, it would have produced around $2.4 million with only $216,000.00 in contributions.  Notice how little you had to contribute over your career to produce the overall total?  It’s phenomenal!  Five hundred dollars may seem impossible when one is starting out so you can adjust that number to come up with whatever fits for you, but don’t underestimate your ability to save with proper motivation. There are many online calculators that can help you with this.

The details of my story will be different than yours, but it is important to evaluate how one spends their time.  Do we give the things we value most, the time that we should?  By saving a large chunk of your income and investing appropriately the possibilities are endless. It will allow you to simplify your life and focus on the things that matter most to you.  These might include family, friends, your health, career, volunteering, travel, hobbies, etc.  The point is whatever brings you contentment.   Simple investing helps create simple living. 

There is detailed information on investing within my website on the investing page along with resources for investing and simple living under the recommended resources page.  Please feel free to contact me with comments or questions. 

Recently I was browsing through a bookstore while on a road trip and happened upon a book titled The Whole Foods Diet by John Mackey (CEO Whole Foods Market), Alona Pulde, MD, and Matthew Lederman, MD.  This is not my typical fare, but it looked interesting and of course, it was in the bargain section, so I purchased it.  I spent the rest of the road trip completely engrossed in what I was reading.  It completely changed my paradigm on what I knew or believed about diet and nutrition and has led to me reading many additional books on nutrition.  This in turn, has led to many personal changes for me but what really struck me was how similar the food and financial industries are.  You may be thinking, what the heck is this guy talking about? 

Let’s take budgeting in personal finance.  If you have read any of my previous blogs or explored my website, you know that I believe a budget is essential to track where your money goes along with providing a complete picture of your financial status. Trying to lose weight is similar in a sense in that one needs to track what you eat.  One can track every calorie consumed or learn which foods are healthiest and incorporate those into your daily nutrition.  Either way it takes discipline to be successful financially or managing your weight/health.  If you trying to save money, one needs to budget and count every penny; if one is trying to lose weight – one needs to measure and count every morsel. 

The financial industry has many fees attached to the products they try to sell you or as they put it, have you invested in.  Many of these fees are “baked” into the product and are not visible to the average consumer.  These fees include management and fund fees along with loads, which is just another name for a fee.  The food industry operates in a similar way through their labeling process, which can mask ingredients in their products by using many different names for common ingredients Have you ever noticed any of the following when reading labels- fructose, lactose, sucrose, dextrose, maltose, glucose, ethyl maltol?  These are all sugars!

Both industries try to make things more complicated by the way they market their products.  The financial industry wants you to believe that investing is a complicated process and they have the ability to enhance your investment returns.  Neither of these is true.  The food industry uses words like natural and fat free, which really have no meaning to most people.  For instance, lunchmeat can be labeled as natural, but both the National Institute of Health (NIH) and the World Organization (WHO) have labeled all processed meats as known carcinogens.  Yes, potentially cancer causing!  You won’t see that on the label.  To understand the label on most packaged food products, you would need to be a chemist.   

Neither industry may have your best interests in mind.  For example, your portfolio return over time can be reduced by a full 65% if your financial investments are being charged just a 2% fee. That’s a massive amount!  The food industry adds sugar and salt in approximately 80% of packaged food products for the sole purpose of getting people to eat and purchase more of their products.  That’s even worse than losing 65% of your money; you literally are losing your health!  Do you think that may be possibly why close to 70% of the United States population is overweight?

Dave Ramsey, a nationally known personal finance expert, has a famous quote he uses to people who are trying to get out of debt: “Nothing but beans and rice, rice and beans.”  He also says, “You shouldn’t be seeing the inside of a restaurant, unless you’re working there.”  Note the connection between food and finance. The irony of these statements is they can be perceived negatively, when in truth, they are excellent choices from a health perspective even if you aren’t in debt.  I find this rather humorous as it is a good example of how counterintuitive the information we receive can be.

If you lumped the beer, wine and liquor industry in with the food industry, there are similar comparisons that can be made.  Most people don’t realize that the chemical name for alcohol is ethanol.  Yep, the same stuff that mixes with your vehicle gas.  I was stunned to find out that both the NIH and WHO have labeled alcohol as a known carcinogen as well.  They also never mention that alcohol is one of the most addictive drugs in the world.  You won’t find that on any label. One of my hobbies is bicycling and I am always amazed at how craft beer and bicycling have become synonymous.  I’m not sure drinking beer and hopping on your bike is necessarily the best situation but many biking events are now sponsored by breweries.  From a healthy living standpoint these two don’t seem to fit together. 

Personal finance, alcohol, and food are all marketed in a similar fashion, often times with scenic backgrounds such as people sitting on a beach enjoying whatever “the good life” is. Their idea of the good life involves spending money along with eating and drinking in an unhealthy way.  The irony is that what I find to be “the good life” is generally the exact opposite of what they try to make us believe is important. 

The financial, food and alcohol industries operate pretty much the same way in that they have hidden fees, hidden ingredients, obfuscate the truth, make things complicated and undersell you on the risk of their products.  As my youngest daughter said to me after discussing this, “I feel we’ve been lied to all of our lives.”  I’m not sure we’ve been lied to, but one certainly needs to question most things before accepting them as truth.  Particularly, the most important things in your life.

Bottom line, it takes work to decipher the important things in life and not just accept things at face value.  You may be thinking who has time to figure all of this stuff out?  This is where simple living can help.  Eliminate all of the unnecessary things in life and focus only on the most important.  By living simply, it allows you the time to live a healthy lifestyle, nurture your relationships and build financial security. In my view these are the best and most important things in life and will bring one the most contentment.

My post titled Health, Relationships and then Finance has more information on this topic.  If you have any questions or comments please let me know.  If you’re interested in any of the topics above, check out my website and recommended resources section. dy Tex