Top 5—investing moves when you’re just getting started

A week ago, my Uncle Lynx passed away.  At the funeral I was chatting with some distant family members (my cousin’s wife’s nephew).  He and his wife are a super cute couple.  They are in their early 20s and just getting started on this crazy journey called adulthood.

As we were chatting, the subject veered towards personal finance (me talking about personal finance . . . imagine that).  This couple’s ears perked up and then seemed genuinely interested; I suppose it’s possible they were just really polite, but I think it was something more.

It got me to thinking about what are the most important things to do in the world of personal finance when you are just getting started.  Here is my Top 5 list:


5. Figure out your debt situation: If you’re lucky, you won’t have a lot (or any) debt.  For most of us there is some out there, and that isn’t necessarily a bad thing.  List out every debt you have (student loan, mortgage, credit card, car payment, etc.), the balance, and the interest rate.

On a spreadsheet (see #4) rank them in order of interest rate.  As a general rule I use a cutoff of about 6%.  If your interest rate is above that pay those off right away, starting with the highest interest rate debt first.  If your interest rate is below that, that might be okay to keep that debt and just make the normal monthly payments.

If you have any debt (especially credit card debt) at any rate higher than 10%, that’s a “debt emergency”.  Really look at every purchase you make—if it’s not critical to your survival (food, shelter) then pass that up until your debt is paid off.  The only exception to this is #1—funding your 401k.

You can get creative with your debt by consolidating high interest rate cards onto a lower rate card or one that offers a low teaser rate.  That could save you a ton of money, and you should probably look into that, but ultimately, you’ll need to pay that sucker off.  So just hitting the grindstone of paying off your credit cards is a must.


4. Make a budget on a spreadsheet: Take a spreadsheet and put a quick budget together that includes your income, your expenses, and the difference between those two.  This can be simple at first (and it should be simple at first).  Over time, you’ll add more and more sheets to the spreadsheet for things like your mortgage, investments, kids’ education, and other things.

But at the beginning, you need to get a sense of where your money is going.  The budget will give you an aspirational view of this.  After your budget is done, you can track your spending with a website like  This two-step process lets you figure where you want to spend your money, and then also look at where you actually spend it.

Of course, this is an iterative process, and as you close a month and look at your expenses, you can see if you’re spending more than what you budgeted.  This isn’t a time to beat yourself up (being too hard on yourself is a sure way to stop looking at your finances closely, and that’s a REALLY bad thing), but a time to ask yourself why you spent more and if it was worth it.

As an aside, using a spreadsheet is a really good skill in general.  I was really good at spreadsheets and it’s hard to overstate the incredible impact it had on my career, as well as the incredible wealth those skills gave me and my family.  And really, my experience with spreadsheets started in college when I was creating a financial budget.


3. Educate yourself on investing: At a young age, educate yourself on investing.  Obviously, this blog is the universally acknowledged best place to learn about investing, but I have heard rumors there are others. is a great website that looks at personal spending and his early posts had a tremendous impact on my outlook.  A Random Walk Down Wall Street is a book on investing that really defined my investing strategy; I read that as a 19-year-old and still think about its insights today.

There are a lot of websites written by millennials about spending and personal finance that might resonate even more.  A few are:,, and  Most are about reducing spending and budgets and that sort of thing, but there are some on the nitty gritty of making investing choices.  You’ll want perspectives on both.

The whole point is that you need to know what you are doing here.  Spending 20 hours early in your life to figure out basics like asset allocation, tax avoidance, and fee minimization as well as a general attitude towards saving early can easily lead to hundreds of thousands or millions of dollars.  That comes to about $50,000 per hour—not bad.


2. Start an IRA with $1,000: This is as much about the experience gained as it is about actually investing your money.  Vanguard lets you start an IRA with $1,000 as the minimum amount.

You’ll navigate through their website, figure out how to make choices (like Roth or Traditional IRA—go traditional).  You’ll pick your investments, and then you’ll have something to look at every once in a while to see how it’s doing.

So many people are just at a total loss when it comes to setting up accounts for their investments.  That becomes a real problem once you hit 30 or 40 and you’re starting to get behind the 8-ball; you know you need to do something but are kind of clueless on where to start.  Doing it now lets you get your toes wet in this world and makes the next accounts you need to set up (529, 401k, brokerage, etc.) all the less daunting.


1. Get the company match on your 401k: #2 was more for experience than for investment.  Here is where you should start walking down the path for investments.  At a minimum, contribute the match and take the free money.

This is so important for a couple reasons.  First, you’re getting that free money.  Second, you’re making your first “asset allocation” decision.  When it comes time to pick which fund to invest in, unless you have very unique circumstances for an early-20s person, I would definitely go with a 100% equity index fund.

Third, your 401k is a really powerful tool.  If you had no other investing tool, you could still grow a 401k to well over a $1 million during your working career.  That is enough to fully fund your retirement.


BONUS—Stay poor:  Too many young adults make a huge mistake of trying to mimic the lifestyle their parents provided, once they (the young adults) get out of school.  That first paycheck of $2,000 is going to seem like a ton of money (and it is).  It’s really tempting to decide to buy a new car or go on a kickin’ vacation or upgrade the furniture.  Resist the urge.

Your parents took 25 or more years of working (with pay increases and investment returns) to provide the house and cars and vacations you enjoyed your senior year of high school.  It’s not realistic to think you can have stuff at that level of niceness so early.

A car is a really good example.  In general, automobiles are horrible investments.  To the degree you have a car that can get you from point A to point B, keep it.  A new car will be nice and cool and make your friends gawk, but it’s a horrible use of money.  A couple hundred dollars a month for a car, plus insurance, and maybe $50 for a gym membership, $50 for cable, and $80 for four dinners at a restaurant—those numbers add up.  Those alone could fund your savings in the early years.

Your early 20s are a time when it’s still okay not to have the best and nicest of everything.  If you can embrace that, even when you do have the money, and put that extra money to work in investments you’ll build a very strong financial foundation that will afford you many more opportunities are you reach your 30s and 40s (remember, I did that and I retired at 36).

BOOM—Top 5 impressions of Dow’s 1150 free fall

Yowza.  Yesterday was a crazy day.  There’s an ancient Chinese saying: “you are lucky to live in interesting times.”  Definitely the past couple days the stock market has been interesting.

Yesterday I got cocky and wrote a post on the 666 point fall on Friday.  I was a bit aloof, and the investing gods love nothing more than to humble people like that.  So in a weird way, I take some of the responsibility for the 1175 point drop yesterday.

Seriously though, let’s take a look at what’s going on.  Here are my Top 5 impressions of what happened, and what it all means.


  1. Biggest point drop in a day

Yesterday’s 1175 point drop for the Dow was the largest of all time.  Living in interesting times, right?  But at a 4.1% decrease (I’m going to be using S&P 500 for percentages just because it’s a broader market and the data is easier to get), yesterday was about the 30th biggest drop since 1950.

A top 30 (or bottom 30 depending on how you want to look at it) is notable given there have been over 17,000 trading days since 1950.  However, top 30 means that on average, something like this happens about every other year or so.  Maybe not so special.

Remember the last time we had a drop this big?  Of course you don’t.  In August of 2011 there was a -4.5%.  Actually, August 2011 was a crazy month—there were FOUR days with percentage drops greater than the one we had yesterday.  Think about that for a second.  The month of August 2011 was a major rollercoaster with a lot of ups and downs.  Stocks were down 5.7% for the month.  But we don’t remember that at all because it was just a blip.  Just.  A.  Blip.

That’s how I think we’ll remember this one.  There are never guarantees, but this stuff happens all the time in investing during your 60+ year investing career.  Get used to it.


  1. See the horrors of automated trading

Look closely at the daily chart right around 3pm.  It took a super-steep nosedive, at that point falling to about 1500 points.  But then, nearly as quickly it recovered about 500 points.  That a huge swing in about 10 minutes.

What caused that: Automated trading.  Computers saw all the selling around them and were programmed to sell too.  However, what should be very comforting is that humans (and other computers with different programming) saw that and realized that the selling was overdone.  They stepped in and started buying.

Computer algorithms are a newer phenomenon in the market.  I did a post of how they lead to much more volatility (written the last time the market went really crazy).  However, while volatility may rise, it really doesn’t have any long-term impact on returns.

But the lesson here is realizing that a lot of what goes on is driven by thoughtless, emotionless computers that don’t really realize if there is an “overreaction”.  As a human who has perspective, that means you can keep your cool when that stupid machine thinks it’s all going to hell.


  1. How bad are things really?

This is important.  What has fundamentally changed since a week ago when stocks were at an all-time high?

Really not much.  There was a jobs report that showed wages had crept up a bit.  On top of that Janet Yellen has stepped down as Chairwoman of the Federal Reserve, and is being replaced by Jerome Powell.   Yellen was seen as fairly dovish on inflation, tending to keep rates lower for longer to spur higher employment.  Powell is a bit more hawkish and is seen as more likely to raise rates more quickly to fight inflation.  That goes to the whole thing we were talking about with the Fed yesterday.

Beyond that, which I think is a bit of a Red Herring, there aren’t any fundamental economic problems that are causing this.  In 2008 the mortgage crises exposed the rotten foundation of the banking industry; in 2001 the internet bubble popped and exposed massive accounting frauds; in the 1970s OPEC exercised considerable cartel power (something that I wrote about here as unlikely to occur again).

That’s a quick rundown of all the major stock market disasters of the past 60 years.  I don’t think there are any fundamental issues like that which we are uncovering to cause that to happen now.  Rather, while we remember those three listed above, just like August 2011 there are a dozen mini-disasters that turned out to be much bigger bark than bite.  I think that’s what we’ll have here.


  1. What I think is going to happen

Making predictions on the stock market is a sure way to look stupid, but I’ll do it anyway.

I think we’re definitely in for a wild month.  I bet today (Tuesday 6-Feb-2018) the market will be up 200 points, then down 300 and another 500 the next two days.  We’ll have a ton of volatility for the rest of the month, and we’ll end February down 4.8%.  For the year, I will stick with my prediction from December 2017, and I think we’ll be up 5%.

What am I basing that on?  A lot of gut, and that’s never a good thing.  The market has had an unprecedented run.  These things can’t last forever, and the market does take “breathers” (sometimes called corrections).  I think that’s what we’re going through right now.

However, the fundamentals are strong.  The tax break is a big boon.  Even more important, the tax break and a lot of other things are spurring innovation.  Money is being deployed in R&D instead of sitting in banks in Ireland and Switzerland.

Being as involved as I am in the medical device space, I know tremendous innovation is happening.  Diabetes is on the brink of being cured by Medtronic; bear in mind in the US we spend about $250 billion (read that again, a quarter TRILLION) to treat that.  Think of all the benefits that will follow.  Also we’re on the brink of having driverless cars which that alone will create well over a trillion dollars in sales and societal benefit.  Those are just two of probably a dozen you could rattle off.  Bottom line, I think things are really good right now.


  1. How this should impact your portfolio

It shouldn’t.  Definitely this shouldn’t scare you off into selling your portfolio.  There’s a famous saying in the stock market that says “You should be scared when others are greedy, and you should be greedy when others are scared.”

A week ago stocks were flying high and everyone was greedy.  As it turns out we should have been scared, but hindsight is 20/20.  Now that everyone is scared, we should be greedy.

That said, I wouldn’t try to time the market either.  A friend, Mr Snow Leopard, has a bit of cash sitting on the sideline and we were chatting about this and what to do.  I said if it was me, I would invest in equal installments over the next three or so months.  I know that goes against my analysis on how to invest a windfall, but I think things are so crazy right now, I wouldn’t feel comfortable putting all the chips in on one hand.  I’m going with my heart over my head, but oh well.

I think we’ll definitely be in for a rocky ride and I think there are going to be a few of these really good buying opportunities interspersed with glimpses of optimism.  Either way, DEFINITELY DON’T PANIC AND SELL OUT.

Top 5 reasons to be thankful as an investor

Today is a special day in the United States.  We reflect on all the amazing blessings we have in life—our families, our jobs, our friends.  For me it’s Foxy Lady, Lil’ Fox, and Mini Fox in some order.  There’s also world peace (more on that in a second), technology that has immeasurably improved our lives, and a little place called the United States of America.

However this is a personal finance blog, so what are the Top 5 reasons to be thankful (wearing an investing lens) for:


5. No wars—This is a pretty humanitarian one. In my lifetime, the biggest war the US (and the developed world for that matter) has fought is probably the Second Iraq War with 4500 deaths. That’s a tragedy for sure, but compare that to the generational death toll of US soldiers from war pre-1975: Vietnam-58,000; Korean War-37,000; World War II-405,000; World War I-117,000.  That alone is SO, SO much to be thankful for.

Of course, war is bad for investing.  It destroys buildings and infrastructure that is meant to produce things.  Once the war is over those things either need to be rebuilt which costs a lot, or people just move on and all that productivity is lost.  And that’s not even mentioning the dead, many of whom are educated and highly productive people.  No matter how you cut it, armed conflict is bad, and we’ve enjoyed an amazingly peaceful 40 years, even with those periodic skirmishes. That’s great for investing.


4. Tame inflation—When I was growing up, and even when I was in college in the late 1990s, we always thought inflation would naturally settle around 4-5%. Before then, expectations were even higher.

We all know that inflation relentlessly eats away at the purchasing power of our savings.  Some economists argue whether too low of inflation is good or bad (I think the lower the better), but everyone agrees that too high inflation is a bad thing.

For the past 10 years we’ve had inflation hovering around 1.5%, including 2015.  This year looks like it will be around 2.1% or so; that’s higher than it’s been in nearly a decade which speaks to how low inflation has been.

When you look at economic disasters over history, more often than not, they involve crazy inflation that has run out of control.  We’ve had a great run on this, and there’s no reason to think it will end any time soon.


3. A nation of laws—It’s easy to get caught up in all the BS of politics and a 24-hour newscycle that our nation is facing right now. One might think that the country’s going to hell, but it’s not.

Things work.  We have rules that 99.99% of the people follow 99.99% of the time, and the system works.  This is especially true in the stock market where by and large it’s a fair game.  There haven’t been any major scandals or houses of cards like we saw in 2008 or 2001 or even 1929.

There’s always going to be some level of shenanigans just based on the nature of greed, but as an investor I do feel things are on the up and up.  So long as that’s the case, we’ll make money.


2. A 9-year bull market—So far in 2017, stocks are up about 20%. That’s pretty astounding. That has created a tremendous amount of wealth for common investors.  That’s an incredibly democratizing process.

As good as this year has been, it’s just the latest in a string of amazing years since 2008.  However, if you take a longer view, over the last 40-years, things have been equally spectacular.  The average return since the year of my birth (1977) . . . over 11%.  And that’s compounded annually which is something all those 4th and 5th graders from the Summerfield Open will appreciate.

We’re on a good run right now, and of course it will slow down at some point, the timing which Robert Schiller and I disagree on (and I’ve been proved right so far).  But even a longer-term view shows how good things have been, and really there’s no reason to think the future will be otherwise.


1. Internet—I’ve mentioned this a number of times, but it’s hard to overstate the amazingly positive impact the internet has had on investing. First, it makes actual investing so much easier. You can research companies more efficiently than could have been imagined pre-1995.  Also, you can actually conduct transactions so much easier, compared to before when you had to do everything over the phone with a broker.

Also, there are those little companies called Amazon, Microsoft, Apple, Google, Facebook, and a slew of others.  Those all have business models based on the internet.  They have brought tremendous benefits to society, and along the way have made tons of money which has gone to their investors, this one included.


So many things are more important than money and investing, and those are at the top of my list of things I am thankful for as I dig into my turkey today.  However, wealth is a great enabler.  For me it allowed me to quit my job to become a full-time stay at home fox for my two cubs.  To the degree that my investments facilitate that, I am thankful for investment tailwinds like the five I just mentioned.

Everyone, have a great Thanksgiving.

DIY oil changes and investing

The Top 5 ways changing your own oil is like doing your own investments

Just the other day, I changed the oil in our 4Runner and our Honda.  It was the first time in my life I ever did that by myself instead of taking it to a dealership or one of those quick lube places.  First, I want to thank my new BFF Jesse Bearcat for helping me.

Second, as I was doing that and since, I have started to think how changing your own oil is a lot like doing your own investing.  In fact, a lot of the benefits of doing an oil change yourself are exactly the same as doing your investing yourself.


Here are my Top 5:


More conscientious:  No one cares more about you and your wellbeing than you.  Twice in my life I have had horror stories of the guy at the shop doing a crappy job and it leading to bad, bad results.  They were sloppy and forgot to connect a hose which led to my car breaking down and needing a tow.  Once I was driving on the road into the LINCOLN FREAKIN’ TUNNEL.

When I do the work on my own car, the car that hauls around my family, you can be sure that I check and double-check every screw and tube and everything.  Investing is the same.  Is someone else going to check the next day to make sure your fund transfer happened or that the change in your 401k allocation took?


Better materials/parts:  I buy name-brand oil and filters.  I don’t know if they are better than the discount stuff those quick-lube places use (normally I am a big fan of generics, but motor oil seems a little different).  It’s an open question.  At a quick lube place I never used synthetic oil because it was an extra $30 or so, and I’m too cheap for that.  When I do it myself, 5-quarts of oil costs about $3 more when you buy synthetic, so that’s a no-brainer.

Similarly with investing, when you do it yourself you can pick the best mutual funds at the lowest price.  I have spent a ton of time on why I think index funds with a low management fee are the best.  When you do it yourself, you can pick anything you want.  When someone else does it for you, your choices tend to be more limited.


Better use of your time:  This is a bit counter-intuitive, but it’s absolutely true.  When you change your own oil or do your own investing, you actually save a lot of time.  To change your own oil, you take 5 minutes to set everything up, 1 minute to unscrew the oil plug, and 1 minute to unscrew the oil filter.  Then you let the car drain for 10 minutes or so while you’re doing something else.  You can come back, screw the new oil filter on (30 seconds), screw the drain plug in (30 seconds), fill the oil and check the levels (5 minutes).

If you go to a place it might take you 10 minutes to drive there, 10 minutes waiting time, 20 minutes for them to do it while you’re stuck in the car.  Doing it yourself saves a lot of time.

Investing is the same way.  If you have your investment advisor do it all, you still need to meet him, drive to his office or schedule a call, etc.  You can do it on your own at night in your pajamas after the kids have gone to bed while the World Series is on in the back ground.  I know which one I would choose.


Look at other things:  As I have started doing my own oil changes, I am becoming more knowledgeable and look at other things about my car as well.  When I went to a place to get my oil changed, they always say I need extra stuff down, and I totally shut them down because I think they’re just trying to fleece me (good analogy to personal finance there).  However, there are other maintenance things you need to do to your car.

Changing the air filter is one of those.  The oil change place says I always need to do it, and I actually do it every once in a while.  Now that I change my own oil, I have the confidence to check that and it’s surprisingly easy.  I can do it in 2 minutes (plus get a good price on the filter from which is maybe 80% less than what they charge me).

Investing is the same.  It’s easy for an “expert” to come at you and tell you all the things you need to do.  It’s natural to resist that a little, knowing a lot of it you don’t need to do, but some of it you probably should do.  As you get more knowledgeable, you’ll know what does make sense (probably an IRA) and what doesn’t (probably an annuity).  That can pay HUGE dividends (figuratively and literally).


Lower cost:  It costs $40-60 to change our oil at one of those quick lube places, plus a lot more if they did my air filter and other stuff.  It’s much higher at a dealership.  My all-in cost for an oil filter and 5-quarts of synthetic oil are probably about $20.

Those are decent numbers for a car, but you know how that translates to your personal finances.  If you do investing yourself, you can save a boatload in costs and fees that would line the pockets of investment advisors, mutual fund companies, and everyone in between.


Top 5: Investing lessons from Madoff scandal


A few weeks back, ABC did a two-part miniseries on the Bernie Madoff scandal.  It speaks to how busy two little cubs can keep a fox that it took me that long to watch the show on DVR.  Ahhhh, parenthood.

Here’s a quick primer for those not familiar with Madoff:  He ran a hedge fund which turned out to be a $50 billion pyramid scheme.  He’d take people’s money, say he was investing it, give them statements showing awesome returns, but all the while he just kept the money in his bank account.  When the Great Recession hit and everyone wanted to take their money out of the market, his investors went to get their money and Madoff finally confessed that he perpetrated probably the largest financial fraud ever, in any country in any era.

Overall, I enjoyed the miniseries, but I’m really into personal finance so that shouldn’t be too surprising.  Obviously Madoff is a cautionary tale of fraud and cheating, and how you as an investor should avoid those things.  No kidding, right?  You might as well say not to drive on the day you’re going to have an accident.

But investing fraud still happens, all the time, every day.  What are the lessons you can take from the Madoff case that can help you avoid being ripped off.


Top 5 lessons from Madoff

5. Remember that you’re the boss: One of the major reasons that the Madoff fraud was able to go on for so long is that no one ever took their money out.  It’s not that the investors didn’t want to get the money every once in a while, but when they went to make a withdrawal, they were told that if they took their money out they wouldn’t be able to reinvest it at a later time.

That implied threat is a little bullsh*t.  It’s like a kid saying if you disagree with him, he’ll never be your friend again.  It’s your money and the investment advisor is working for you, not the other way around.  Any time you want to do something with your money and you’re told “no” that’s a massive warning sign.  Now maybe you want to do something that doesn’t make sense (like cash out your 401k), and there it’s appropriate for your advisor to help you make a good decision.  But it is your decision and once you’ve made it, your advisor should support that decision 100%.  If it is anything less, you should run the other way.


4. Keep it simple, stupid: Madoff claimed that he was using a very complex investing strategy that involved options and other really complex derivatives.   It had a lot to do with investing in equities and then doing short covering with by selling calls or buying puts.  Confused yet?  That’s a bit of the point.

Had Madoff actually been doing what he said he was doing, it was an incredibly complex strategy that very few regular investors would understand.  Hopefully one of the things we learn from this column is that investing is simple.  Doing things like investing in index mutual funds to minimize cost and maximize diversification aren’t that complex.  Neither is taking advantage of the tax benefits of 401k’s or 529s or IRAs.

Actually, my experience, and something you have heard me say countless times on this blog, is that when you go away from simplicity and start to get into complex investments that’s when everything goes to hell.  The fact that Madoff used that complexity to facilitate his fraud is just another reason to keep things simple.


3. If it’s too good to be true, it probably is:  Somewhat related to #4 is the age old wisdom that if it seems too good to be true, it probably is.  What made Madoff’s investments so appealing is that he consistently had returns in the 10-12% range year after year, in good years and bad years.  Of course we know that in investing there is a fundamental tradeoff between risk and reward.  The fact that Madoff was producing high returns with very little risk (variability in those returns) should have been a major red flag to investors.  You never want to look a gift horse in the mouth, but you also don’t want to keep your head in the sand.

And actually many of Madoff’s investors knew something was fishy.  They just thought he was “front running.”  That’s an illegal practice where he would know the orders that others were placing and then invest right in front of those.  Think of it this way: if you know there is going to be a major order to buy Coca-Cola stock, you could decide to buy Coca-Cola just before the big order hits.  When that big order does hit, it will likely increase the stock price, and you benefit from that rise.  It’s totally illegal, but it’s also a great way to do really well in the stock market.

This is a bit of a sad commentary.  Madoff’s investors were fine when they thought he was cheating and they were benefitting from it.  But if you play with fire you get burned.  They were right that Madoff was cheating but it turned out they were the victims.  Somewhat ironic.

Anyway, back to the moral.  If you know something is fishy, you need to figure it out.  Hopefully this blog has helped set expectations for you on the stock market—stocks average about 6-8% over long periods of time but there is a ton of volatility from year to year.  If someone is claiming to defy gravity, you really need to take a long, hard look at what’s going on and figure it out.  Which leads us to . . .


2. Understand what your investment advisor is doing: When people would ask Madoff how he got those consistent, high returns we mentioned in #3 he said he really couldn’t explain it because it was too complex #4.  So we’re seeing a few problems here.

However, people were fat, dumb, and happy (plus add greedy to that list), so they left well enough alone.  But that’s a major no-no.  Even if you have someone helping your with your investments, you should still know what’s going on with your money.  For your advisor to respond “it’s too complex; you wouldn’t understand it,” is just unacceptable.

I get that for some investment advisors there is a proprietary nature to their work and how they pick their investments.  Telling you gives away the secret sauce, and it’s understandable that they wouldn’t want to do that.  Of course, I totally disagree with that because I believe in efficient markets, but I can accept that other people see things differently.  That makes this a really sticky issue.  You really should understand what is going on with your investments.  If your person is unwilling or unable to explain that, then you should probably find someone else.


1. Do it yourself: This is a little bit of a snarkey comment, but there’s a lot of truth to it. Madoff stole from people for his own benefit.  You know the only person in the world who can’t steal from you for their own benefit?  YOU.

Of course, that’s not to say you shouldn’t trust others, but trust is a big word, and especially in investing there are a lot of unscrupulous people who are waiting to steal your money.  If you distilled this blog down to a central there, it would be that with investing you can do it yourself.  This isn’t rocket science, although some people try to make it more complex than it needs to be #4.  This can be simple stuff that over the long term is virtually guaranteed to make you money.


There you have it.  My Top 5 lessons from the Madoff scandal.  Investing is a critically important part of preparing for your future.  The path is lined with crooks and cheats, so beware.  But let’s not end on that pessimistic note.  You can do an amazing job investing for yourself and that can protect you from the frauds.  That’s better.

Top 5—Investing blunders your instincts want you to make



“You are your own worst enemy” ― Lisa KleypasLove in the Afternoon

The human brain is probably the most amazing machine/invention/feat of evolution/gift from god (put whatever superlative you want in there) in the world.  Over millions of years it evolved to allow us to outsmart saber-tooth tigers, control fire, figure out how to grow crops, organize millions of individuals, split the atom, splice genes, and on and on.  I don’t think anyone can reasonably argue that the evolution of our brain isn’t the single most important factor which has brought us to where we are as a species today.

Yet, as undeniably amazing as our brain is, the instinctual behaviors that were so important in surviving those early years as a species are terrible when it comes to investing.  Here is my list of the Top 5 ways that your instincts tend to be wrong when it comes to investing.


5. Keeping up with the Joneses: My dad told me some sage wisdom when I was growing up: “There will always be someone richer or smarter or stronger or faster than you. What you need to do is worry about doing the best you can and forget about them.”  That’s pretty great advice in general, but especially in investing.

You’re always going to meet someone who made a killing on Apple or whose portfolio has ballooned to $5 million.  First, maybe they’re full of it; investing is like fishing, where everything is exaggerated because that makes the telling of the story more fun.  Even if they aren’t exaggerating, who cares?

Investing is a “slow and steady wins the race” type of thing.  If you save money and invest it wisely doing all the things we’ve talked about, you’ll almost certainly end up with a nestegg that will meet your retirement needs.  But it’s when people start stretching themselves and try to get big wins that things go to hell.  Using a baseball analogy, in investing you win by hitting a bunch of singles while never going for the homerun.  When you see the Joneses who got lucky when their stock popped, and you get tempted to try to find the next stock that will do that instead of sticking to your index mutual funds, that’s when you get in trouble.


4. Remember the last thing you heard: Psychologically we have something called recency bias, which basically means that we put the most weight on the last thing we heard. This makes sense if you think about it when we were cavemen.  If you hear everything okay and then a few minutes later you hear there’s a fire, it’s probably a good thing to believe something is burning.

The problem with investing is that we live in 24/7 news cycle so places like CNBC have to fill hours of airtime.  One day they have a story that says Tesla is the greatest auto company ever and their stock will go through the roof.  A couple days later they have a story about how sales slowed and the stock is way overvalued.  So which is it?

Probably somewhere in the middle.  Generally, companies don’t change that much from day to day.  If Telsa stock was worth $250 yesterday why would it be worth $220 today?  Sure, sometimes there are major news events that can move the needle that much like a court ruling or a natural disaster or something, but those are much rarer than you would think based on the wild swings in sentiment that come out of the financial media.  As with #5, this is a case where you need to see past the day-to-day comments and just keep that “slow and steady” approach.


3. Sell too soon: You take the leap and buy a stock or mutual fund. And then it goes down.  Holy crap!!!  What just happened?  I screwed up and need to get out of this before I lose any more.  So you sell too soon.  Yet just a little bit ago you thought it was a good investment, so why are you selling now?

In the light of day it’s easy to see this is a mistake and your emotions are taking control from your intellect, yet it happens all the time.  This is especially true in a media environment where we’re constantly bombarded with reasons to buy and sell.  The “slow-and-steady” investor is going to ride out those storms and hold on to the investments that were good ones yesterday, knowing that they’re probably still good ones today.


3a. Hold the stock too long:  The cousin to selling stocks too soon, is holding them for too long.  I am personally guilty with this with commodities.  Over the past couple years they have taken a nosedive, down about 50%.  But I refuse to sell because I am “waiting for them to come around”.

There’s a lot of reason to think that commodities are going to continue to fall—more oil discoveries, the world economy and especially China’s is slowing down.  Of course, who knows what will really happen.  But I think psychologically, I just don’t want to sell because that will be admitting that I made a bad investment choice.  Intellectually I know I should probably move on and sell my commodities, but I just can’t do it.  Pride is something you can choke on.


2. Try to figure it out: Our brains have a pretty good track record of figuring things out—math, physics, weather, biology. Not bad.  So it’s understandable that we have this desire to figure the stock market out, and even more powerful, a belief that we can.

Yet the stock market is a different.  It is people that make the stock market go, with all their irrational behavior (like the things we’ve discussed here).  Because of that, I believe the stock market is totally unpredictable over the short term.  But many people don’t share that opinion, and they spend inordinate amounts of time trying to figure it out.

Some of it can be more simple stuff like “the stock always does better after the earnings report”.  Or it can be hard core like all the technical analysis that uses stock charts, 200-day moving averages, open options, float and volume, and a million other factors to try to tease out what will happen in the future.

I am not a believer is that stuff.  Rather, I accept that in the short term the stock market is going to act erratically but over the long term it will have a steady upward march.  So I invest in index mutual funds with every paycheck and not try to beat the system.


1. Get while the getting is good: Momentum investing is so tempting. If a stock is going up, it’s easy to imagine that it will keep going up.  If everything is going to hell like has been happening the past couple days, it’s easy to imagine things will stay bad.  Similar to the ones above, this makes sense from an evolutionary perspective.  As a caveman, if the land was giving really great harvests, it made sense to stay there and enjoy the bounty.  If panthers already ate a couple villagers, maybe it’s time to go somewhere else.  There wasn’t really this idea of riding it out or waiting for things to even out.

However, in investing balancing out the ups and down (it’s called “mean reversion”) is a tried and true concept.  When a stock is going up a lot, we know that it can’t go up forever, and at some point it will probably come down to more rational levels.  Of course we never know when that’s going to be.  In the meantime, it’s easy for our “animal spirits” to take over and want to keep riding the stock up and up.  This situation isn’t helped by the media which understandably reports on the biggest movers, reinforcing the message that “XYZ has been going up and here’s why it’s so great.”

But this is a sucker’s game.  Warren Buffet is famous for saying: “Get scared when everyone is greedy, and get greedy when everyone is scared.”  Again (notice how the same advice keeps you out of all these blunders), you can save yourself from this by just investing in broad mutual funds (instead of trying to pick individual stocks) and investing regularly (like with your 401k contributions) rather than trying to time the market.


So there you have it—my list of blunders that our hypothalamus is constantly trying to steer us towards.  And they’re tempting.  I am certainly guilt with some of these.  Yet if you know these blunders are out there, you can take steps to avoid them.  And avoiding them, even if it leads to just a 1% better return, can make a huge difference.

As cavemen, we were playing a harsh game where the cost of even a small failure was often fatal.  Decisions needed to be quick and they needed to be bold.  And you know what, that worked for us.  Look how far we have come as a species.  But all those things that allowed us to thrive as cavemen poison our investing returns.  In investing, you really need the opposite—slow and steady moves over a long period of time.


What do you think?  Are there any blunders I missed?

Top 5: Reasons we are in the golden age of investing


You hear all the time that this is a terrible time to be an investor.  Maybe it’s after the fallout of some scandal, Enron and Worldcom from the early 2000s or Bernie Madoff from 2008 come to mind.  Or maybe it’s that the market is evolving and people caught on the wrong side of that start to complain.  Last year Michael Lewis published Flash Boys which looked at high frequency trading.  One of the takeaways was that Wall Street giants were rigging the game to their advantage at the cost of smaller investors.

flash boys

I’m not an expert on high frequency trading or the million other death knells that people always point to when showing that the market is all screwed up.  The eternal optimist, I actually think this is a great time to be an investor.  Here are my top 5 reasons why we are in the golden age of investing.


5. Decimal stock prices: Today if you look up the price for a stock you get something normal looking like $40.63. However, before 2001, stock prices were quoted in fractions, so that same stock wouldn’t be $40.63, it would be 40⅝.  First off, that was a royal pain the butt.  Quick, which would cost more $20.30 or 20⅜? (20⅜ is more).  We all remember fractions from elementary school, but they aren’t really intuitive in financial applications.

Secondly, it cost you real money.  All stocks have a bid/ask spread which is the difference between what someone will sell something for and what they will buy it for.  That difference is the profit that market makers get.  As an investor you pay that spread, so the larger the spread the worse for you and the better for them.  When stocks were in fractions, just the nature of fractions made the spread fairly large.  So you might have an bid of 20⅜ and an ask of 20½.  That’s a spread of 12.5 cents for every share you trade.  That may not seem like a lot, but over hundreds or thousands of shares that starts to add up.

When stocks became decimalized, that 20⅜ became $20.38 and that 20½ became $20.50.  But then competition among market makers squeezed the spread to something like $20.41 and $20.42.  It’s not uncommon to see spreads of only a penny (see a recent quote I pulled up for Medtronic).  That is real savings that goes into your pocket.  In 2001 the SEC mandated all stocks be quoted in decimals and that was a real win-win: investing became computationally easier and less expensive.

Medtronic chart


4. Internet trading: You could have a whole post on how the internet has revolutionized personal finance (hmmmm, maybe I’ll do that). But here I’ll focus on internet trading and generally managing your investments online.  When I started investing in the mid-1990s the main way you invested was by calling your broker and having her execute the trades you wanted.

Think about that for a second.  You had to call someone, hope they answered, tell them what you wanted to do, and then have them do it.  That just seems really inefficient.  Later, some mutual fund companies got to the point where you could trade using your touch-tone phone (“press 1 to buy shares, press 2 to sell shares”), but even that was pretty kludgy.

Of course, once the internet came out, investing proved to be one of the ready-made applications for cyberspace.  You could actually see your investments on a screen, in real time, push buttons to do what you wanted.  Even set up things like automatic investments or withdraws.  No question, it’s so much easier now than it was.


3. Low costs: With the internet and the incredible efficiency it brought, the costs of investing plummeted. Brokerage fees on some of my first trades were in the $50-75 range.  That was with a full-service broker.  Also there were ways that they nickel-and-dimed you with things like “odd lot hikeys” which was an extra charge if you bought less than 100 shares.  Such a bunch of crap.

That was about the same time that “discount brokers” were becoming popular and started offering internet trades for $14.95.  Once that genie got out of the bottle, there was no end to how low trades could go, and it made sense.  All the stuff became automated, so the costs dwindled to almost nothing.  Now you can find $4.95 trades and places like Vanguard offer $2 trades if you know where to look.

Think about that for a second.  If you did 10 trades a year, in the old days (dang, that makes me sound old) that would have cost you $1500 per year (remember you get charged for buying and selling).  Over an investing career, that $1500 each year could add up to almost a quarter of a million dollars!!!  Maybe Michael Lewis will complain that investors are getting swindled out of a penny or two a share because of high-frequency traders, but that’s a drop in the bucket to what they’re saving by tiny, tiny trading costs.


2. Computing power: As reader Andrew H said in a comment, technology has advanced so rapidly that your iPhone has much, much more computing power than the Apollo 11 spacecraft. Computing technology has become amazing powerful and amazingly cheap in the past couple decades.  A $300 laptop with Excel can allow you to do amazingly large and complex analyses that would have seemed magical just 30 years ago.

One of the huge applications for this analytic power is personal finance and better understanding the stock market.  Many of my posts on this blog are just that—taking data and using Excel to make sense of stuff.  Are you better of investing a windfall at once or over time?  How often would you have lost money in the stock market historically?  Those are fairly large analyses that would have been a massive undertaking 30 years ago, probably only possible at a major investing house or a university.  Today, they’re done by a nerd with a cheap computer and too much time on his hands.

That computing power has been an amazing equalizer on the financial playing field.  Now individual investors can figure things out for themselves instead of having to listen to brokers like they were priests from some secretive cult.  That’s an enormous improvement.


1. Access to information: This is a biggie. The amount of information available to us now with the internet is mind-boggling.  When I was a kid your source of information on stocks and investing was the evening news (“stocks were up 52 points today”) and the newspaper where you could look up the price of a stock from the previous day.  That was it???  That was it!!!

Today you have real-time price quotes, you have real-time news, you have real-time analysis.  You also have troves of data, and nearly all of it is free.  All the analyses I have done is with free data on historic stock prices and inflation.  That’s nice if you’re a dork like me, but how does this help normal people?

In investing, information is power, and we live in a time where that power is freely given to all.  Let’s say you wanted to invest in Ford in 1990.  How would you go about researching your investment decision?  Maybe call Ford’s investor relations to have them mail you some annual reports, possibly go to the library to find some articles on the company, probably stored on microfiche.  That’s crazy.  Today you can find all that information plus about 1000 times more in less than 5 minutes on your computer.  It truly is a completely different ballgame, and one that is very much to our advantage compared to what it had been.


Bonus reason—financial understanding:  I couldn’t stop at five reasons, so I am including a sixth (the “Top 6” just doesn’t have the same ring).  There has been tremendous research into financial markets and how they behave over the last couple decades.  While markets are still very unpredictable by their nature, we understand them much better.  Ideas like price-to-earnings ratio, index mutual funds, efficient markets, and a thousand others help us better understand how and why the stock market does what it does and that allows us to be better investors.

In a similar vein, the central bankers who guide our economy, and by extension the stock market, have learned a lot too.  One of the theories on why the Great Depression was as bad as it was is because President Hoover and his advisors did all the wrong things.  It’s not that they were vindictive and wanted to drive the country into a calamitous financial train wreck, but they just didn’t know what to do.

I absolutely believe the reason we haven’t had another Great Depression, including the Great Recession where we emerged largely unscathed, is because our central bankers are a lot smarter.  Paul Volker, Alan Greenspan, Ben Bernanke, and Janet Yellen all studied the Great Depression and other financial disasters and learned what those people did wrong and how similar fates can be avoided in the future.  That understanding has saved us a lot of pain.


So there you have it.  Sure, investing isn’t always a smooth path, and as Michael Lewis points out, there are always bad apples that are trying to screw things up.  But with all that, don’t lose sight of the fact that investing today is soooooooo much better than it has ever been before.

What do you think?  Are my glasses too rose-colored?  Are there other awesome developments that deserved a place in the top 5?