If we had an infinite time horizon, ‘retire early’ would not matter. It will just matter to retire at a certain point.
Duh.
By ‘retire’ I mean being free to do whatever you want, not necessarily ‘not-working’.
You save, you invest and a certain point your saving pot will be big enough to generate an income that covers all your needs. But we are mortal, we have a finite amount of time, therefore the sooner we get free the better.
During the holidays I watched the third season of Master of None. One of the two protagonist is a writer that got successful with her first book but flopped with the second. She is forced to go back to the 9-to-5 life and in the last episode explains very effectively why it sucks.
I also read this great post from BankerOnFire and some charts made me think.
Yeah, I wish I saw this too when I was 18. The earlier you put ‘money to work’, the longer returns compound, the greater the impact on your saving pot. That was my gut reaction.
But then I scrolled back to this chart:
If you want to retire be free in 10 years with an allowance of 20k/year, you have to save 86% of your salary if you earn 40k but only 43% if you earn 80k. I probably do not have to tell you that is actually easier to save more when your salary is high than when it is low. Or that for the non-professional athletes, non-Disney Club stars among us, your salary starts at a low level and grows with your age experience.
Here is the conundrum. If you save €100 when you are 25, those saving will go a long way then you are 55. But the same extra €100 have a f’ing big incremental utility when you are 25. Would I trade some of those expenses I had in my 20s to be free a bunch of years earlier now? Yes, probably. It is easier to say it now? YES. I do not know how many of those expenses brought me here; I do not even know which ones. [yes, if learned how to cook, or even better found an interest in cooking, I would have saved money AND got a valuable skill. Do it]
I was not the guy who would have told you “I am going to play in the NBA” when I was 12. Money buys confidence. Because money gives you access to experiences. And experiences turn into experience. I cannot fake till I make it, I have to make it first. I also think I wrote enough times on this blog my idea about this trade-off, live your young life at fullest vs saving early.
What I would like to write this time is about that note at the bottom of the chart you might even have missed: *Based on 8% annualised return. The other day I saw below twit:
There is nothing wrong about it, is a concentrate of good advises. Yet imagine showing it to me when I was 25. Imagine showing it to anyone who’s 25yrs old. High quality companies with great balance sheet and profitability? Even if they know what a balance sheet is, how do they know which one is great? Profitability? Do you remember this graph?
I was learning finance 101 at university during the dot.com crash. Four years after I graduated, the Great Financial Crisis happened. I do not show you Japan, I show your almighty god, the S&P500:
Stocks for the long run? Yeah sure.
Now look how the Italian stock index performed until 2008…and what did after, compared to the S&P500:
There has been a time when buying SPY, the ETF, was not that easy outside the US. But why would you do it anyway if all indexes were pretty much correlated? Why take USD risk if you are not US based?
It is easy to say 8%/year now that SPY gained 16%/year in the last 10 years. I know, that is the average return of the last 100+ years but try to convince someone that lived through the decade I showed you above. Come to me with “DCA into index” (ffs like there are not 10k indexes out there) when I was 25 and I would have showed you the best Brian Cox impersonation before Brian Cox was a thing.
I was trading. I knew the power of compounding. And 8%/year via simple buy and hold was credible to me as Dogecoin. Re-run those charts with 4% returns instead of 8% and you will change your mind, you realise that progressing in your career, earning more, was the (only) way to escape velocity, not small savings. Or yes, doing double-digit returns via active trading.
This is a topic I am musing about since a while. After I started to read and follow many FIRE bloggers, I found a lot of articles, posts and videos on how easy it is to save, invest and compound. It is. Opening a brokerage account to buy an index every month has never been easier. The problem are all the things that happens before that step.
Let’s say you start your investing journey from a clean sheet. Jon Snow, you know nothing. If you are lucky, your parents will teach you how to do it. And if you are smart enough to understand that you should listen, you will inherit their biases: a portfolio full of bonds, or your home-country stocks, or… You won the genetic lottery and yet, your portfolio is not the 8%/year one.
People around you will mention anything-investing only if they are having any kind of success at that specific point in time. You will have inputs from the wrong group, because even if they have the skills to outperform in the long term, quite unlikely, it is even more unlikely they will be able to teach you how to do it. Your cousin that is saving under his work pension plan and investing in a Vanguard index wont mention it during your visit at Christmas. It is boring s**t.
Boring s**t do not sell neither, so skip traditional media. There was a time when you could find a useful article on a national newspaper or, god forbid, on tv but that ship has sailed a long time ago. Anything you read these days is probably worth something only if you have a Delorean to go back in time and place some trades accordingly.
And then there is the ultimate knowledge divulgator of our age, social media. If I had a pound every time I heard a blogger say “I got into investing because I read Rich Dad, Poor Dad” I would be a TikToker by now.
If you are looking for good investing advice, social media will put in front of you people that are good at social media, not investing. Jim Cramer was an hedge fund manager. Jim Cramer is on tv now because his show has an audience, not because his audience makes money watching him.
He probably moved to tv because it is easier to stay rich that way; for sure, it is more fun for him than reading income statements all day long.
There are ‘web-stars’ that are also preaching the right verb, the Ritholtz’s gang, Meb Faber, BankerOnFire obviously, I think I mention at least one in every post. If you fall on one of them early in your journey that’s great for you. But the odds are quite stacked against it. And if you find them early, you have to realize they are the right one to follow. That’s the issue with those charts, that’s the issue with that 8%. Even if you start to save early, getting ‘ the real 8%’ (which by the way is a great handle, @thereal8percent) ain’t easy.
Who’s the ideal financial advisor? Someone that can understand you: your fears, your goals, your biases. Someone that can establish a connection with you, a personal relationship. Who’s great at this? Scammers. Financial scams are built on trust. A good financial advisor is competing with con artists that not only have the right skill-set, they can also sell a better dream. @thereal8percent is warning you about 50% drawdowns and lost decades, Bernie Madoff offers you 20% a year, every year.
If you are young and manage to save those €100, you probably want to have something back now for your sacrifice, not in 30 years. Why research if a robo-advisor is better than another when you are already reading about crypto projects? Now you have the capital to participate. You have the capital to see if you can day-trade or to buy your favourite stock. If you are young and saving, the odds you will have 0% to -100% returns for the first years is quite high. And it is fine.
It goes without saying that is better to save and get 0 than to not save at all. At least you are building the right habit for the future. In my case, I was not saving as much as I could/should because the low returns were not justifying the trade-off I spoke before. I also liked what I was doing, my focus was to progress my career, not to stop it as soon as possible. I was young and I wanted to go harder.
It is not all doom and gloom
Let’s conclude with a positive spin.
In UK all employers must offer a workplace pension scheme by law and the total minimum contribution is 8% (5% from your salary and 3% from the employer pocket). The great thing is that the account is in your name and you can decide where and how to invest. It is an effective way, at the bare minimum, to stimulate the employee curiosity about saving for retirement: nothing pushes you more to investigate than seeing your hard-earned money taken away from your pay check. The scheme gives enough flexibility to generate interest but within the perimeter of a controlled environment, so that the risk of scams or huge losses is quite limited. I think the same process has been adopted by other European countries, but in some jurisdictions the money goes in an ‘anonymous pool’ managed by a third-party entity that you cannot access other than the sporadic report you receive. It makes the process way too impersonal.
In UK you can also open Individual Savings Accounts for yourself and your children. Those accounts are tax-exempted, again another good incentive for folks to inform themselves, and the saver can access a great deal of investment options. Opening one for your kids is obviously a nice way to teach them the importance of saving and the rudiment of investing. The account is in their name therefore, at least in this case, greed is good because it will stimulate them to understand what is going on there.
I leave last a thorny topic for a lot of people. There is a way to get back ‘lost time’ and it is leverage. If retiring is the goal line, leverage is like the NOS button on a Fast and Furious car. It gets you there faster and allows you to recover lost ground…but in the hand of an unexperienced driver, can lead to some R-restricted content:
What I am reading now:
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