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comment by user-inactivated
user-inactivated  ·  1033 days ago  ·  link  ·    ·  parent  ·  post: Does anyone know anything about personal finance stuff?

So everyone is thinking investments. They're skipping over basic step one stuff which I don't know if you've done or not.

Step 0: Pay off unsecured debt. You said you're not really savvy with this stuff so I'm going to define unsecured debt as debt that you couldn't pay off by selling the thing the debt is for. A mortgage isn't unsecured. A car loan isn't (as long as you're not upside down because you bought a new car, or your house lost value). If you have credit card debt, student loans, any of that stuff, pay it off. Some people will disagree with this because they think that if you're paying 8 percent interest on a credit card, but going to see a 15 percent return on an investment, that you should take the higher return investment. To me, this ignores cash flow, which is more important than a small difference in return on investment. First, that credit cad interest rate is guaranteed to be that rate or worse, and your investment is not guaranteed to do a damn thing. So to argue that an ROI is higher and so that should be the only consideration is naive. Second, if you pay off a debt, you no longer have a minimum payment on that debt. This allows you a great amount of flexibility in how you spend your money otherwise. I find this to be valuable in an intangible way.

Step 1: Save cash in an emergency fund. It should be as much as you're comfortable with. Generally that's said to be about six months of salary or living expenses. So take all your outflows for the month, multiply times six, add 10% for what you're forgetting, then put that amount of cash away. If you can do this, and you have no debt already because of step 0, you are infinitely richer than almost everyone you know or see every day. This is money you can quit your job with and take your time to look. This is a security blanket. This is freedom money. Honestly, if you've done this already, and you have any money left over, you've left the realm of 'not a lot of money' for most people.

Step 2: Pretty much anything else you want to do with your money after paying off debt and saving is based on risk aversion.

You retiring tomorrow, or forty years from now? If tomorrow, save it. You won't see a return on it. If forty years from now, you can tolerate risk. Sequence of returns has lot to do with your final payout, you should read about that. That's basically the thing that the stock brokers aren't going to tell you. Sequence of returns doesn't affect their bottom line, but it does yours.

If you can tolerate the loss and eventual rebound, an index is less risky than you can probably tolerate and you could look at smaller investments that a broker can walk you through. But they're guessing just like anybody else. You very well could lose everything you give them. Just accept that if you're going uber risky. Think of the money as gone and everything else is a happy surprise.

But if you index it, you're looking at the standard 11% overall return.

kleinbl00  ·  1033 days ago  ·  link  ·  

This is good advice. Psychologically the argument could be made that paying off lower-interest debts, so long as they can be paid off fully, has more mental benefit than partially clobbering a big debt.

Most americans have effectively zero savings.

user-inactivated  ·  1033 days ago  ·  link  ·  

Honestly most of my financial technique is based on how debt and savings make me feel with the caveat that I feel as if I have a strong core of common sense.

I know that mathematically it's not the strongest return to pay off my mortgage as fast as I do, but in a few years, I won't have a mortgage to pay off. And that's going to make me feel infinitely richer.

kleinbl00  ·  1033 days ago  ·  link  ·  

Mathematically it probably is. Every cent you pay over minimum should go to principal, not interest, meaning that less interest can be charged. We pay a smidge over minimum pretty much every month.

But then, we also got to abuse TARP funds and turn our 2-year-old 30-year into a 15-year with the same payment back in 2009 so there's that.

user-inactivated  ·  1033 days ago  ·  link  ·  

Shit man, luck is the intersection of preparation and opportunity (Seneca-ish). Take it when you can get it.

kleinbl00  ·  1033 days ago  ·  link  ·  

As a friend put it, success is being in the right place at the right time and the most successful people spend a lot of time in the right place.

flagamuffin  ·  1033 days ago  ·  link  ·  

note that step 2 can, when the time is right, definitely involve investing in property rather than stocks. doesn't have to, and whether it's a good idea depends heavily on what part of the country you live in, but it's certainly an option

iammyownrushmore  ·  1033 days ago  ·  link  ·  

Hey yellow, thanks for the advice.

For context, I am most certainly at the risk aversion step, I should have been a bit more descriptive. The easiest part of reading about personal finance was the first two steps you outlined, which I was able to fulfill. I got inundated when it just went a little bit beyond that, but your comments in that regard are still very helpful.

    You very well could lose everything you give them. Just accept that if you're going uber risky. Think of the money as gone and everything else is a happy surprise.

I am not a gambling man, this is terrifying to me.

kleinbl00  ·  1033 days ago  ·  link  ·  

...so... allow me to temper this a little bit.

You've probably heard the phrase "blue chip stock." This is a known, trusted, predictable large company ("large cap") whose finances are stable. The company has been profitable for a long time and there's every expectation that it will continue to be. These companies, by virtue of being profitable, pay out dividends - every quarter, you get some amount of money per share you own.

Let's say you piled eleven thousand dollars into Ford on May 17. Why May 17? Because shares were $10.92 on May 17 which means now you own 1000 (ish) shares of Ford which is convenient for the sake of math. Right now, Ford is at $10.94. You've experienced a capital appreciation of 4 cents per share - if you were to sell all your Ford stock, you would have made forty whopping dollars. Congrats! But also keep in mind that three weeks ago, Ford declared a quarterly dividend of fifteen cents per share... which means you made $150 on your Ford stock without having to do a thing.

This is one of the reason people participate in the market. So long as Ford continues to make money, and so long as you continue to own Ford stock, you will continue to make money. You can sell that Ford stock at any time and you can do whatever you want with that money (within the tax regime it's invested in - if it's in a retirement fund, you'll pay heavy tax penalties if you pull it out before you retire).

Ford (for example) is not much of a gamble. Some crazy penny stock biotech firm? That's a gamble. You don't buy it because it's going to pay you fifteen cents a share. You buy it because there's an off-chance GlaxoSmithKline will buy it and double your money. Of course, if GSK doesn't buy it, you're shit out of luck because that stock will go to zero appallingly fast.

This is the sort of stuff it's worth reading about. Fundamentally, there are alpha gains and beta gains within the market. Beta gains are the rising tide that raises all ships - people wouldn't participate in the market if it were a zero sum game; everyone benefits just by investing in companies that will probably be profitable. Alpha gains are money you make above and beyond whatever the market is making. Alpha gains are zero sum - for every dollar you make above the beta, someone else makes a dollar below.

Alpha gains are speculative. Beta gains are straight boring investing. Be boring. Be cautious, be careful, be slow, be steady, and be boring. Over the long run you will make money so long as you don't fuck around like a jackass chasing wall street. You will lose.

Here's twelve High Frequency Trading houses tossing Merck orders at each other for ten milliseconds.

dublinben  ·  1033 days ago  ·  link  ·  

All this being said, a mutual fund based on an index like the S&P 500 is more diversified, and therefore less risky than any single equity. If you are afraid of "gambling" in the stock market, just park your money in a low cost passive index fund, and let it grow.

kleinbl00  ·  1033 days ago  ·  link  ·  

Yes and no.

A NASDAQ ETF right now is mostly exposed to Facebook, Amazon, Apple, Netflix, Microsoft and Google. All of those stocks have insane P/E ratios. They're actually more prone to shock than something boring like 3M.


A diversified index fund covering lots of boring stocks is largely bombproof.

A 3X inverse ETF is based on an index and is about as stable as plutonium.

Either way, an ETF based on a long portfolio of dividend - paying stocks will pay a dividend. In many cases, particularly where the market is at, the dividend performance outstrips the appreciation performance.

rthomas6  ·  1029 days ago  ·  link  ·  

What do you think about a Russell 3000 ETF? That and small-cap value ETFs are where I have most of the stock portion of retirement.

kleinbl00  ·  1029 days ago  ·  link  ·  

Boy. I don't know that I can even say anything useful. I don't know that anybody can. My personal strategy is to find a lazy portfolio, backtest it, make sure I understand the way it moves and make sure I think it'll fare okay from what I understand of the geopolitical climate for the amount of time I expect to hold it.

Which basically says I'm macro AF, and that I disregard everything but fundamentals. It's probably about as conservative as you can go and I've definitely given up some gains that way. But it's what I understand, and what makes me feel like I have a reasonable sense of cause and effect.

I think the stock market is deeply overvalued and headed for a correction. From a macro sense, from a fundamental sense, a Russell 3000 ETF does not strike me as a good value at the moment. But that's my take, my tea leaves, my entrails, not yours.

OftenBen  ·  1029 days ago  ·  link  ·  

Purely a butt-in:

I have a few grand of employer matched contributions in a TIAA account, since there is a 'correction' incoming, would that money be safer somewhere else?

kleinbl00  ·  1029 days ago  ·  link  ·  

Prolly not. If you know what that fund is invested in you could do your own research. I'm nobody's investment counselor.

user-inactivated  ·  1033 days ago  ·  link  ·  

I mean, you could always just keep it. You'll just be losing the real value at the rate where inflation outstrips your savings interest rate.

dublinben  ·  1033 days ago  ·  link  ·  

I think that your steps zero and one are probably the most realistic recommendations for receiving a "bit of money, not a ton." If this is unlikely to be a life-changing amount of money, then it's probably unnecessary to worry about thinking any further than those steps.

If this is actually a potentially life-changing amount of money (six-figures or more), then I recommend the advice on this Bogleheads managing a windfall article.

iammyownrushmore  ·  1033 days ago  ·  link  ·  

It's a bigger amount than "a bit" and I don't have any debt. I work with some very wealthy people so my context has gotten a bit skewed in the last few years.

I'm definitely glad you point to the article you did, I have already read it, but there were gaps in my understanding. So every time I read something built upon that one, I still feel like I'm playing catch-up and I don't like missing details. Which makes me thorough, but also a bit obsessive until I feel like I grasp it well.