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College Grads, Here’s How to Become Millionaires
- _delirium 16y agoThis is extrapolating from a pretty small data set, and worse, the data set was collected in circumstances different from the ones it's being used to make predictions in. It's quite possible stocks will go up in the 2010s, but the fact that stocks went up in the 1940s after losing a bunch in the 1930s isn't a very good reason to think so--- the pattern is extremely weak, and collected from a data set that isn't nearly big enough to falsify these kinds of pattern inferences. But nonetheless, you can still do better analysis than these kinds of eyeball-the-chart analyses. Does this prediction of cyclic returns hold up under some attempt to retroactively test it, e.g. via cross-validation? And of course that's ignoring the bigger problem, that it's quite possible average returns in the 21st century will not be as good as average returns in the 20th century were, making any extrapolation too optimistic.
- maigret 16y agoThis whole stock story I found also a bit doubtful. Mint is obviously selling its product ;) But a quite boring fixed interest saving plan would do the same effect, probably with less return but with more security.
- cageface 16y agoExactly. In fact, I'd say it's much more reasonable to expect stocks to do worse in this century. Physical resources are going to be tougher to acquire and more expensive and major scientific advances are going to be more difficult. It won't surprise me at all if the cheap, easy growth of the 19th-20th centuries turns out to be the exception, not the norm. I expect a lot of the current hype and froth around social networking and the web is going to turn out to be no more monetizable than it was ten years ago when people were making similar handwaving arguments about revenue and profitability. I suppose Asia might buck the trend but a portfolio highly skewed in that direction now is a fairly speculative investment.
- REALLYHUGENEKO 16y agoStocks are, generally, fairly speculative. If they weren't, everyone would invest in stocks. The person this article imagined had an unfair advantage- he knew that the decades upcoming would see stock upturns, so stocks were not as speculative. Still, stocks just need to beat the rate of inflation. I can easily see them doing that after they've fallen so much.
- Unseelie 16y agoA diversified stock portfolio is betting on economic growth. The economy has grown consistently for the last six hundred years.
- _delirium 16y agoWell, it's betting on some other factors as well, like the portion of the growth that publicly held firms will capture (versus more of the growth going to new startups or privately held firms). A stock portfolio is by necessity non-diversified on that measure, though large investors can diversify by putting money into VC, angel, and private-equity funds, among other things. It's probably also geographically non-diversified, since some of the fastest-growing markets are hard to buy into (e.g. China is very picky about what kinds of shares it lets foreign investors buy).
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- xiaoma 16y agoI suggest reading some of Siegel's books. There are good records going back two hundred years. The stock market has beaten every other asset class, every single decade between 1810 and now. You might make an argument that things will change due to a technological singularity, but stock performance has been remarkably consistent over the long run. http://caps.fool.com/Blogs/1802-2009-performance-of/282249 http://caps.fool.com/Blogs/1802-2009-performance-of/282249
- fanboy123 16y agoMy lifetime might not be long enough for "the long run." Any longer than that and your 200 years means very little.
- Unseelie 16y agoThe argument is that stocks have been the best asset class investment in each decade for the last two hundred years, not that it takes two hundred years. I'm going to guess that you'll live for at least another decade, and tell you to go right ahead and consider that the long run. If you've any multiples of decades, you're even more set.
- _delirium 16y agoThat certainly isn't true. For example, stocks were not the best asset class in the 2000s (bonds did much better this past decade). The linked page is just giving broad "stocks are generally better", but isn't doing decade-by-decade comparisons (which would be interesting to see).
- Unseelie 16y agoGranted. But aside from the last decade, the article does claim that stocks win. (from 1930 to 1996). The recent decade is astoundingly bad...especially considering all the neat, new things we've gained..
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- cageface 16y agoI've also read in many places that the truly wealthy don't invest in the open market at all, but rather in private investment funds with high barriers to entry and much better, on average, returns.
- trunnell 16y agoThe article is referring to the business cycle, a well-established economic phenomenon of unpredictable cycles of expansion and contraction. http://en.wikipedia.org/wiki/Business_cycle http://en.wikipedia.org/wiki/Business_cycle > This is extrapolating from a pretty small data set I wouldn't call the last century of the US stock market a small data set. Perhaps what you mean is that the author's choice of decade-long windows is too arbitrary? But regardless, the business cycle is a broadly accepted and easily observable phenomenon. Exactly what causes these cyclic fluctuations is hotly debated (at least it was ten years in my macro-econ classes.) > it's quite possible average returns in the 21st century will not be as good as average returns in the 20th century The article wasn't arguing that one should expect those exact returns, but rather that positive returns are cyclical-- good times generally follow bad times.
- maigret 16y agoThis article is pretty right on some points. Most millionaires are just good earners (but not rich) who live under their financial capacity, and saved over a long time. Because of the compound effect, it is also much more important to save while young. But of course everything is a trade off: a good dinner for networking or a set of new clothes (think you may have to buy a suit to meet your first customer) can produce a positive return.
- Qz 16y agoDon't know about the stock thing, but finding a cheap city to live in (Pittsburgh being one) and living like you're a poor college student is definitely one way to save a crapload of money. What some people earn and spend in a year will probably last me 3-4 years if not more.
- prodigal_erik 16y agoHow's the pay, though? I moved to the Valley because the extra income is much, much more than the extra costs. I wouldn't want to move somewhere cheap unless I either stopped working, or started a business with income not connected to the local wages.
- natrius 16y agoThe extra income in the Valley isn't enough to make up for the increase in cost of living compared to many places, such as Austin, where you can also find good tech jobs. http://swz.salary.com/costoflivingwizard/layoutscripts/coll_start.asp http://swz.salary.com/costoflivingwizard/layoutscripts/coll_...
- Qz 16y agoExactly -- Pittsburgh also has a lot of tech jobs, with most of the big players having branches in the city, as well as a lot of startups in the area, most of them related in some way to CMU. And if you're at all interested in robotics, this is the place to be.
- prodigal_erik 16y agoWhat I get from that is "The cost of living in Austin, TX is 26.4% lower than in San Jose, CA" and "Employers in Austin, TX typically pay 20.9% less than employers in San Francisco, CA." Pretend I make exactly $100k here and pay 33% tax. Moving to Austin costs me $14k in net income (0.209 * 0.67 * 100000), so my living expenses here would have to be at least $53k (14000 / 0.264) just to break even by reducing them. But that would mean I'd been spending over 79% of my net income just in living expenses, which to me sounds too precariously balanced to be sustainable. In reality I make somewhat more and save half of it, so I'd barely come out ahead if my rent in Austin dropped to $0.
- intel4004 16y agoAlso don't forget that the total inflation between 1970 and 2000 was 340%, that is 4.03 millions of 2040 dollars would only be worth 0.9 million in todays dollars if history repeats itself.
- dantheman0207 16y agoYes, but hopefully it doesn't. There was some nasty inflation during that period. It could be worse, it could be better this time around.
- lazyjeff 16y agoYet another "spend less, invest in the market" article.
- startuprules 16y agoThe S&P, adjusted for inflation, has returned -30% for the last ten years But go ahead and feed the machines at goldman sachs some money.
- quizbiz 16y agoMany would argue that ten years isn't nearly long term enough. 40 years perhaps.
- okmjuhb 16y agoMeasuring stock performance by looking at one of the biggest bubbles in recent years and comparing it to one of the biggest crashes in recent years is a little bit dishonest. Given that this article is writing to young people interested explaining how they should invest if they're interested in their financial situation 30 years from now, a 30-year outlook is more reasonable.
- Retric 16y agoThat's only if you put your money in a the start, put 100$ in every week inflation adjusted and you will have made money over the last 10 years. PS: I made over 40% last year just buying mutual funds in my 401K. Look for the worst 40 years to dollar cost average inflation adjusted and your return is going surprise you.
- itisfritz 16y ago12000 X %473(inflation) = $5,676,000 This is why I don't trust banks. Realistically you would of been smarter to buy capital that could immediately help your situation. It seems to me bettering yourself as a person with that money results in greater gain. http://inflationdata.com/Inflation/Inflation_Calculators/Inflation_Rate_Calculator.asp#calcresults http://inflationdata.com/Inflation/Inflation_Calculators/Inf...
- Retric 16y agoNo, 12000 X 473% = 12000 X 4.73 = 56,760.
- basman 16y agohmm, so I guess by this argument, if I flip a coin 3 times and it comes up heads, the next time is more likely to be tails...
- bengebre 16y agoThe argument is that stock market returns are not a random process but exhibit mean reversion: http://en.wikipedia.org/wiki/Mean_reversion_%28finance%29 http://en.wikipedia.org/wiki/Mean_reversion_%28finance%29 In short, large deviations one way are more often followed by large deviations the other. If mean reversion is true, the coin flipping analogy is not an accurate one.
- Ygor 16y agoSave money and invest for your entire life so you can be rich when you are older. I don't know. A lot of people doing this end up spending their whole lives making more and more money, only to realize in the end that they have all the money they need, but very little time to spend it. Why not spend your days earning as much money as you can, and using that money to do the things you like. So, when you are older, instead of having 1 million dollars in a bank, you have 1 million dollars worth of experience.
- ddemchuk 16y agodude, beautiful post. The exact strategy I am planning on living my life by
- cageface 16y agoThe goal should be to die with a bank balance as close to zero as possible.
- nostrademons 16y agoI thought the goal was to live a happy life, whether that results in a bank balance of zero or a few million. The reason I save much of my income isn't because I want to be rich when I retire. It's because I can't think of things to spend it on now that would measurably increase my happiness. I'm not big on spending money just for the sake of spending money - that way lies dissatisfaction and the hedonic treadmill, as your desires increase faster than your ability to pay for those desires. I'd much rather think hard about what I want from life and then spend money, carefully and judiciously, to achieve that. If it's not something I want, why should I buy it? Own your money, don't let you money own you.
- cageface 16y agoMoney is virtualized power. If you haven't used it all by the end then you've left things undone. An unused tool is a worthless tool.
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- georgecmu 16y agoThis sounds like a standard spiel that financial advisors at your local bank are trained to give. Even aside from all the problems with this sort of 'analysis' like using past to predict future, extrapolating from a small data set, etc, the fact that their computation of past returns has no reference to inflation should tell you that you'd be better off listening to someone else.
- chopsueyar 16y agoFEED THE MACHINE.
- PostOnce 16y agoIf you make 10 dollars an hour and have an hour lunch, cutting 15 minutes off your lunch nets you $50/month. Taking only a 30 minute lunch nets you $100/month. If that same 10-dollar an hour job isn't picky about overtime, showing up 15 minutes early and leaving 15 minutes late gets you another $100/month. Show up 15 minutes early, take a half hour lunch, $200/month. On $10/hour, that's not something to scoff at. Easier to get rich by focusing on increasing your income, rather than saving what you have, if you are on that low-level wage.
- maqr 16y ago> I’m a student of the market, the author of Investing 101 and can say with some authority that the market’s miserable decade-long performance is exactly what spells huge opportunity for you. cringe
- Emore 16y agoThat's where I stopped reading.
- nostrademons 16y agoThe real reason to save money isn't to invest it in the stock market, it's so that you have the option to pounce when an opportunity arises. Say that a few of your smartest friends are founding a new startup, and they ask you to join, but they won't be able to pay you anything but equity until it gets off the ground. If you've got cashed saved up, you can take this risk; if you don't, you'll have to pass. Stocks can fall into this category, but you should make that determination based on the fundamentals of the stock, not based on the blanket declaration that stock prices have always gone up in the past. If you see a stock that's grossly undervalued by the market, it's wonderful to have cash to pounce on that. If the whole market is (still) overvalued, which it seems to be to me, it doesn't make sense to pour money into it.
- Retric 16y agoFor most people the real value in saving money when they are young is not investment but to avoid debt. 10+k at 22% is a huge trap that catches a lot of people. PS: 10k of CC debt when you are 30 can easily cost 23,000$ EVERY year in retirement. 10,000 * .22 * (1.07 ^ 35). Even if you pay that off after one year you are still looking at (10,000 * 1.22 * 1.07 ^ 34) = ~121,732$ of lost cushion when you retire.
- Unseelie 16y agoThat's the value of a balanced budget. The value of saving is compound interest, whether in money market or stock dividends, or a brilliant startup (what if the startup you pounce on fails or only breaks even?). Saving early means you start in on the compound interest sooner, which means you get a longer timeframe on your exponential growth.
- Retric 16y agoIt's hard to keep a balanced budget that can still handle random expenses like a new transmission or even worse 2 months of unemployment without being in the habit of saving money.
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- sliverstorm 16y agoMy experience in life thus far has suggested to me that it's not about saving, but about growth and pushing forward. You can scrimp and save, but if you instead put your resources to task and try to grow, you can move up to the next level, where your savings from the previous level are a pittance. It is of course inherently more risky, and requires effort, but it seems like a better choice. A case example is my uncle; a member of his family racked up some huge medical bills due to a hospital's mistake decades ago. He is starting a somewhat risky business venture, and I asked him why he wasn't instead getting a job and working. He told me that the bills were so great that working a regular job would never be able to pay them off, and so this was his only option.
- starkfist 16y agoI am in the same position. I lived like a pauper for 5 years, saving all my money. Then most of it got wiped out by a medical emergency. Now I just maximize my income and quality of life. I spend way more money than I used to, yet have also saved up about twice as much as I previously had. I do not recommend the "scrimp and save" approach. As always, YMMV.
- chopsueyar 16y agoLife is too short to not enjoy it.
- quizbiz 16y agoWhat I've been working on is a way to make the value of my tuition while in school. I think I can figure out a marketing service I can sell for $100/week but I can't figure out how to scale it. The challenge of making 50,000/year on my own is fun to ponder but I'm not making much progress.
- larsberg 16y agoExploit the learning and networking resources at your school instead. If you show that you are motivated, there are faculty who will be happy to teach you everything you want to know for zero extra dollars, and might even pay you a small stipend for it. You are surrounded by smart, motivated co-students in a way you will not be when you enter the workforce and more than half of your colleagues enter a downward spiral of mediocrity and low-grade alcoholism. After you graduate (unless you're in the humanities or something), 50k is really just not that much money. And certainly not worth missing out on once in a lifetime opportunities for.
- TGJ 16y agoThe best advice I've ever heard on getting rich. Get a job and bank 10-20% every week. Live on the rest. Get there faster? Get a second job and bank all of that.
- thansen 16y agoThis is a particularly good counterpoint to some of the ideas in the article: http://www.economist.com/node/16479024?story_id=16479024 http://www.economist.com/node/16479024?story_id=16479024 * Even though stocks have fallen in the last decade, they are still historically expensive. Because the fell from such a high peak in 2000. * The more people that follow the author's advice of investing in shares (the cult of equity), the worse their collective return will be. * Unrelated but interesting is that high-yield bonds have outperformed stocks since 1995. If you'd invested $1,000 a month since 1970 you'd be rich. Yes, but $1,000 a month in 1970 was a lot of money. In 1970 the median household income was around $800 a month (in 1970 dollars). It'd be more informative to know how rich you'd now be if you'd invested in stocks something like 20% of the median household income for the past 40 years.
- Unseelie 16y agoI dug up information on the median household income, and the growth of the S&P500, since 1975. Built a spreadsheet based on 10% of the median household income, twenty percent being a huge, huge cut into the money a family could spend at the median levels. Check it out: https://spreadsheets.google.com/ccc?key=t1GNFHQzYRcc4aWOlvZq31A#gid=0 https://spreadsheets.google.com/ccc?key=t1GNFHQzYRcc4aWOlvZq...
- binaryfinery 16y agoTranslation: I need to exist stocks into cash before you idiots realize we're in for a severe bout of deflation.
- jasonkester 16y agoI've been telling this to anybody who'd listen ever since I started doing it myself: Continue living like a college student for 5 years after you leave college and you'll never need to worry about saving for retirement. It really is that easy. You're going from a state where you have $500/month in expenses and zero income to a state where you have $5,000/month in income. It's trivial to save $10k/year at that point unless you go out of your way not to. Even at 10% returns (which you can pretty much always get), your money will double every five years. Don't touch it 30 years, and that's a lot of doubling. And speaking of 30, that's when you can stop. I essentially retired when I was 30 years old, and now just work the occasional short contract to pay the rent. Meanwhile the stack keeps growing in the background, waiting for grey-haired Jason to retire on it 20 years from now.
- bengebre 16y agoLiving like a student for 5 (or more) years is a great strategy, but I just wanted to correct the doubling time math you presented. To double every 5 years you need a 15% annual return (1.15^5 = 2.011). A 10% annual return doubles every 7.2 years, thus the rule of 72: http://en.wikipedia.org/wiki/Rule_of_72 http://en.wikipedia.org/wiki/Rule_of_72
- smackfu 16y agoOf course you need no college debt for this plan. I don't really see how it's so easy to get 10% returns as well. Stocks may average 10% long-term but for the last five years you certainly didn't double your money.
- jasonkester 16y agoThat's exactly what you need them to do: 10% average long term. And they always have.
- roadnottaken 16y agoWhat planet are you on where 10% returns are easy to get? Interest rates are about 1% right now for fixed-return investments. It seems to me that there's no such thing as a safe investment these days and there hasn't been one for a while. Please advise!
- krosaen 16y agoSaving is good, but the "miracle of compound interest" is hard to believe in after a decade where you literally would have been better off stuffing your money under a mattress. Past returns are no guarantee of future gains, so the argument that "we're at a low point and can only go up" doesn't really hold. I mean, I hope the market will go up, I've been investing in a disciplined asset allocation rebalance once a year style for the past 8 years, but, I'm just sayin' So if you don't invest the money in the stock market, where else? Yourself. Live off savings and do a startup. Pay for education. Other ideas?
- glork 16y agoReal estate.
- chopsueyar 16y agoGold. Silver. Copper. Aluminum.
- csl 16y agoI can understand this if I invest in something like an index fund, which is updated regularly to reflect a particular stock market. But it doesn't help if I invest in companies X, Y and Z. They might go bankrupt, in which I will lose my money completely.
- tlrobinson 16y ago"because of the really rotten returns in the 1930s, investors could expect a “catch-up” decade and they got it." I'm not sure it works like that...