This blog is named “Technology and Financial Independence”, but lately there have been no posts related to either. For the Financial Independence part, there is good reason: the fundamental concepts on investing have already been laid out.
Back in 2015, I was engrossed about the topic of personal finance. Coming from a family of modest means, I wanted to build a better future for myself. I read books about finance and investing, followed articles from financial independence bloggers, listened to podcasts, and built my own tools to manage my money. I was sold on the philosophies touted by the Bogleheads and the simple but effective teachings of JL Collins.
After a few years, I found that the books and articles I read seem to just be a rehash of concepts I already learned before. There were diminishing returns if I continued this path of reading and listening to more personal finance content. The truth is, the concepts have already been laid out and what’s left is the implementation.
What’s Old is New Again
Around the time this article is written, the main international news topic is about tariffs and how it shook the global trade system. As mainstream media releases their scary headlines and unleashes their “experts”, I cannot help but feel a sense of deja-vu.
- 2000 – the Dot-com bubble. I was still a young student at this time so I had no knowledge and exposure to the market yet.
- 2008 – Housing bubble crash. I am already working at this time so I had some exposure to the market. Almost lost my second job due to the economic downturn.
- 2020 – COVID-19 happened. I already have significant holdings in the market at this time and watched as my net worth plummeted.
On all these periods, the sentiment was the same: “This time, it’s different”. This time, the market will surely implode and everything will be worthless. But after some years, the market is more than back again. Every single time, I said to myself, “I should have bought more“.
Overconfidence?
“What is wrong“, you may ask, “with exercising caution?“. By overly practicing caution, you may miss the main reason why people make money in the stock market. The idea is to buy low and sell high, but by waiting until “everything settles down” and “it is trending up again”, you end up selling low and buying high instead.
Am I overconfident in these companies that make up the market? Perhaps. But I also believe in fundamental human nature: the pursuit of excellence, or just plain greediness.
The goal of a company is to make money, to make its shareholders rich. This is why companies try to hire the best employees as they can. The CEO wants to impress the board with results, managers want to impress their bosses for promotions, and employees want to do their best to get raises. In times of crisis, these companies adjust their strategy, for better or for worse. They don’t want to go bankrupt. Employees don’t want to get fired. These people will do their best to make sure your investment doesn’t go down the drain.
Sure there will be the Enrons and the Pets.com of the business world. However, if you have been investing in the broad market instead of betting it all on a few companies, then these bad apples will eventually be purged out and replaced with newer and hungrier ones.
“What if it is really different this time?“. In case of a serious global catastrophe, such as a world war or nuclear winter, then your paper assets will most likely be worthless. But the probability of this happening is very small. Why place a higher importance to a low probability event and not get involved compared to a higher probability that you will profit if you do?
Getting Rich Slowly
In the many years of my investing journey, I found that there are fundamental concepts that stand the test of time. These are not your usual “hot tips” that pundits hype when the timing is right. This investing style is boring, but sustainable. These things I learned not only from books and audio content, but from other people’s experiences as well.
Live below your means
The ultimate cliché in the personal finance space, this is the fundamental truth on how to grow (and keep!) your money. No matter how many millions a month you earn, if you also spend millions, you are still living hand to mouth. Living in a mansion, but still effectively poor.
This is the main concept taught by one of my favorite books, The Richest Man in Babylon. You cannot build your wealth if you do not have any surplus. Living below your means is not just a way of accumulating the resources to invest. More importantly, you become a person who saves. You realize the true value and potential of money. And this is a very useful mindset to have whether you are earning thousands, or earning millions.
Investing requires a good foundation
You may want to try investing without having any surplus. Perhaps there is an investment opportunity that promises good return, and you want to get into the action as quickly as possible. This is not a good idea. Doing this is akin to going to the casino so that you can pay your rent. Not only will this make your financial hole deeper, you also now have an unhealthy attitude towards gambling.
This is the reason why in Dave Ramsey’s 7 Baby Steps, investing only comes mid-way and not in the beginning. You need to build a solid foundation first because investing does not come without risk. In the event that your investments fail or did not grow as you expect (which happens often), your life should not be devastated. Invest only on what you can lose. Save your mortgage payment, do not “invest” it just so you can make a quick buck!
You are your best investment
Since the pre-requisite of investing is having a surplus, this means that your expenses should be less than your income. This is perhaps one of the biggest roadblocks towards financial freedom. How can you make or grow a surplus if your income is already wiped out by your basic needs?
You will have an easier time living below your means if your means are large. For example, let’s say you are targeting a 50% savings rate (as you are aiming for early retirement). If you are earning 50,000, that means you save 25k and live on the other 25k. But if you manage to double your income, not only will your savings increase dramatically, but you can then live on 50k instead of 25k. That is a huge lifestyle bump and makes savings easier and sustainable.
There is a limit on how much you can scrimp and save. You cannot just make your blanket smaller and not feel the cold. Eventually, what makes more sense is to make the blanket larger, i.e. increase your income. And to do that, you will need to grow your skills, knowledge, and capability. Before investing in the stock market or real estate, learn how to maximize the best investment you will have.
Protect as much as you can
So you managed to have a surplus, saved for emergencies, and maximized your income. Now what? Everything you built and worked hard for can be undone by a few life-changing events. And while we cannot control when and how these events will happen to us, we do have control on how we prepare for them.
Do not put everything in a single investment vehicle. When that vehicle crashes, you are done for. Some people want to live on a “go big or go home” attitude. While this may have resulted in great wealth for some, in most cases, there isn’t even a home left to go back to. One of the saddest news I heard was from a businessman who went bankrupt, killed his family, and then committed suicide.
It takes some money to protect money. Paying for insurance premiums often feel like wasting money. The reason why most people do not save money is that they cannot see the future that they will eventually live in. This same blindness prevents us from purchasing asset protection. “But it won’t happen to me!“, you may protest. Why would you “waste” money on events that have a low probability? Because when it happens, it can ruin you and your family. Insurance premiums won’t break your bank, but accidents, illness, fire, and calamities will.
So many things in life happen in cycles. The state of the economy and your financial situation is one of them. Sometimes you are on top, and other times you feel lacking. The best thing we can do is to accept these ups and downs, but also to take steps to ensure you and your family are not thrown overboard.
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