I remember hating the book when I read it, as I felt like there was a lot of fluff with some good tips for things around the edges but the real meat of it was horribly wrong. Maria mentioned it so I thought I would read it again as maybe I was too harsh. I still hate it.
Here's things I like about it:
1. Going for date nights to chat about finances is a great idea.
2. Having the bucket for "mojo" money is really important. You need that for peace of mind. However it was very simplistic. If you have a safe job you love you don't need anywhere near as much as someone whose job is not as secure. I understand this is a "cookie cutter" book aimed at the masses but this is a big issue.
Here's things I hate about it:
1. A balanced index super account makes no sense for a young person. Statistically the odds of this being better than a globally diversified all shares account over a 30+ year time horizon are miniscule. I cannot understand why this is recommended other than that it is the safe option for older people and therefore he wants to minimise the risk of criticism. When you are young the odds indicate that you should go HARD at investing, particularly if the money is locked away for 30+ years.
2. Paying off your house quickly has many major ramifications. On first principles it seems logical - this is a huge debt so we should pay it off quickly - but the 2nd order logic rules it out.
a) Why are you buying the house instead of renting it? You could argue security is a factor, but really the only reason to buy is under the assumption that it will be worth a lot more in 10,20,30+ years time than it is now in either real (after inflation) or nominal (not accounting for inflation) terms. If that is the case, and the payment you made for it is fixed to the amount you paid for it, then why would you want to pay the loan off? Inflation will gradually chip away at the mortgage for you anyway, as will the standard payments. You are likely to be far better off investing the leftover money into something that spreads your risk away from this single asset. If instead of paying extra on the mortgage you invest that into globally diversified shares - particularly if you debt recycle and therefore can claim the interest on the loan used for the shares as a tax deduction - you spread your risk away from the house. Then in 10, 20, 30+ years you have the house AND a share portfolio.
b) if you ever intend on renting the house out any extra payments you made will reduce your tax deductions. This is MASSIVE and could cost you 10's of thousands a year in lost tax benefits. A mortgage offset account achieves the same as paying extra but does not have this impact. Seek specific tax advice on this, it's worth paying for.
c) he gives out random stats with no backup - for example "houses often costs up to 5% of the purchase price each year to maintain". Cheap or expensive house, a roof is a roof. Many of the houses which young people can afford are large and in the outer suburbs, so may cost more to fix than a smaller, more expensive house in the inner suburbs. $20k of repair to a $400K house renting for $300 a week wipes out more than a whole year of rental income, whereas for a $2 million house renting for $1500 a week it is only a few months.
d) I don't understand the 20% deposit recommendation. Again, the main reason to buy is assuming prices will go up over time. Lenders mortgage insurance (LMI) is not a huge amount, so why wouldn't you buy with a smaller deposit so that you lock in the current price? If you have to save another 3 or 5 years to get to 20% versus 5% why would you do that? If the price goes up by 6% over that time, which is not a large or uncommon amount, than you have to save more to get to the 20% AND you have a much higher loan to pay anyway.
A quick example of this:
Let's say you were buying a basic apartment/townhouse in a reasonably low-cost area of Brisbane, Australia. The house costs $500K. LMI for a 95% loan (i.e. borrowing $475K, you have "only" a $25K deposit) costs around $15K. Adding that LMI is the equivalent of paying $515K for it. That is a 3% increase on the price of it. Inverting this, that means by waiting to save the 20% deposit to not have LMI you would need to be able to save the remaining 15% of the purchase price (i.e. another $75K) in around 6 months JUST TO BREAK EVEN if the house prices rise 6% in a year (i.e. 3% in 6 months). If you can save $75K in less than 6 months to make this work - the equivalent of more than $150K of savings in a year - you don't need to worry about these miniscule amounts!
If you recommend buying a house why put that caveat on it? Recommending saving longer to get a 20% deposit over a 5% deposit with LMI right now is the equivalent of saying that house prices will not go up in the time it takes to save the extra 15%. To me this is completely illogical, as why would you buy an asset that you do not expect to go up in value? Unless you are good at market timing and are confident that over the next couple of years it won't go up, but then magically you will buy at the right time and it will shoot up from there?
3. Credit cards are one of the best financial investments you can make if you use them correctly. Frequent flyer sign up bonuses are spectacular investments. I cycle through credit cards regularly to get them, you're crazy if you don't. It is not uncommon to pay a fee of around $200 to sign up for a card, but then if you spend enough in the first X months you get 100k+ frequent flyer miles. These miles are often worth around 2 cents per mile in travel credit, which makes your $200 investment worth $2000 of flights. On top of that you get free travel insurance AND access to their business lounges. This is insanely good value for a 10 minute sign up process. Again - only if you never pay interest and pay them off on time. Once the period is over that you need to hold it to get your points, usually a few months, you cancel the card and move onto the next one. For aussies a good site is pointhacks.com.au to see what offers are out there.
4. His recommendations about shares annoy me. He says to buy AFIC and snub active stock pickers, which is a very good diversified listed investment company and a sound choice, but that is just Australian companies. Where is the global diversification? He then later brags about the real estate investment trust BWP he recommended people buy, and says people should subscribe to his newsletter to pick stocks with him. So should you buy an index fund or pay him more money to pick stocks with him. This really annoyed me.....
You can probably tell I'm not much of a fan.....
This is a quick rundown of how we are set up financially. This is not necessarily how you should set it up or think about it, this is just my thoughts.
Our assets, in order of gross value, are:
1. Our principle place of residence (PPOR)
I'm not a big fan of individual houses as "investments"; however I do appreciate the emotional aspects that come with them. When we moved to the Sunshine Coast we did not know how long we would be here for, but we had a 1yr old daughter and thought it could be a nice place for her to grow up. At the time (2016) the Sunshine Coast was still recovering from the large drawdowns in housing value after the combination of the GFC, reduction in coal mining and 2011-2012 floods. While prices had started to go back up they were showing no signs of FOMO. I inspected 30+ houses in person and hundreds more online, and after going over the numbers of all of them we managed to buy a place that we believed was selling for land value yet had a house that had "good bones". To put it in perspective - and show why houses scare me as an asset - we paid $115,000 LESS than the prior owners paid for it 9 years before, and they had spent hundreds of thousands on it during that time period. It was the definition of a money pit for them. While at the time of writing it has gone up in value quite a lot since then anything could happen. You just have to look a few hours up the road to Gladstone to see how carnage can play out in the housing market - house prices there went down around 60% from 2012 to 2018. A house in West Gladstone went from $429K to $170K in that time period. Had you bought in 2012 you would likely have taken on a large amount of debt that you have been trapped with, paying off a large mortgage on an asset dropping in value that you have struggled to rent out and had to pay for maintenance etc. This ruins lives and is my nightmare. Having so much of our financial security trapped in the one asset is always concerning to me, hence why we have the shares inside and outside of super.
2. Our superannuation
I did a lot of dumb stuff when I was young, but thankfully I put way more than I needed to into superannuation from a young age. It is in 100% internationally diversified shares, or as close as I can get to it. We have enough here that once we turn 60 we should have enough to live a very comfortable retirement and look after any health issues that will inevitably arise. We make sure to take advantage of a number of key benefits of super:
a) Spousal splits. Each year I transfer money out of my account into my partners. That makes sure our balances are relatively even. There are a number of thresholds that it is good to stay under, for example the $500K threshold for the 'carry-forward' concessional super contributions. Staying under this threshold means that if I take a couple of years off work or part-time and contribute little to super I can catch up when I come back. Simply, whatever part of the concessional cap you don't spend each year adds up over 3 years. So if I only contribute a small amount and have a large part of the cap I don't use, let's say $20k per year for 3 years, on the third year if I return to work and will have a large tax bill I can put that $60k into super at the concessional rate of 15% tax. That would save more than $13k in tax that year.
b) Spousal contribution. If I put $3k into her super from my after tax money I get a $500 tax rebate.
c) Government co-contribution for low income earners. If my partner puts in $500 of after tax money the government matches it.
Superannuation is brilliant, it has so many tax advantages but also asset protection benefits that people don't think of. The only reason to not take advantage of it is if you are expecting a large inheritance from parents who are likely to pass on when you are around that age. When choosing a superannuation provider go with one that is reasonably low fees, has been around for a long time, and offers the ability to be heavily invested in diversified global shares. We are with Unisuper and are invested in a split between the "High Growth" and "Global Companies in Asia" options that brings the International Shares component to around 50% and the Australian Shares component to around 40%, with the remaining in property and income. We leave it like this, and every year I check to see if the fees are changed. If not then I leave it as is.
3. Shares outside of superannuation. We have much less of this compared to shares in superannuation, purely because of the tax advantages. Obviously we can use a discretionary trust outside super to gain tax benefits, but for our situation it doesn't make that much sense given how we plan to live our lives over the next couple of decades. If we both become low incomes earners, which we probably will as I transition from full-time work, the benefits of a trust become small and the costs outweigh it other than asset protection. However with much of our assets in super there is not much need for it (hopefully - trying not to jinx myself!). Our shares outside of super are setup very simply. I know it is not tax efficient, which I can live with, or as "optimal" as it could be based on back-testing, factor investing or efficient frontiers (I am being sarcastic here - I have serious issues with these methods). What it is though is bloody difficult to guess if its gone up or down based on news headlines. Here is the strategy I use which consists of four index funds:
25% VGAD (An index containing the largest companies in the world, with the value in Australian dollars)
- This is a core part of my portfolio, and is the Australian dollar equivalent of VGS. This means that in addition to the value of the companies in the index, if the Australian dollar goes up it also goes up in value, but if the Australian dollar drops it goes down.
25% VAS (An index containing the largest companies in Australia)
- A simple index containing the largest companies in Australia such as our miners, banks and industrial companies.
25% DJRE (International Real Estate Investment Trusts).
- This is where I differ from many people, in that I am a fan of Real Estate Investment Trusts (REITs). You already own some of them when you have other index funds, as REITs are included in many indexes, however I overweight REITs in my portfolio as they offer some diversification and potential for wild swings (both positive and negative). Global REITs are pretty cool in my opinion, as they encompass everything from beautiful, classic apartment buildings on Wall Street in Manhattan through to industrial workshops in Slovakia (literally, I've checked). I just love the idea of owning not just businesses but thousands of bits of land and buildings around the world. When prices go down I can just bring up a picture of my apartment tower and remember that I'm happy to own a small sliver of it along with thousands of other buildings around the world.
25% IJH (USA midcap index containing 400 middle size USA companies)
- USA midcaps have a long history of doing very well, similar to large cap companies such as Amazon etc. that are in VGAD but offering a little bit of diversity. It's a cheap index that I'm very confident in, so why not?
I buy shares quarterly, the first Friday of March, June, September and December. I debt recycle money out of a split in our home loan and invest it into whichever of these 4 has the lowest value in our portfolio on that day. I then don't check the value until the next investment day. I invest the same amount each quarter, which is based on the plan I wrote. We keep about 3 years of "cash" in offset against our mortgage for peace of mind, the rest goes into shares. I chose 3 years as that means I could leave work that long without selling anything, or could use a big chunk of it to pay for a course and then still have at least 2 years of money to live on while doing the course. It's that simple.
The only debt we have is our house mortgage, which is equivalent to about 1/3rd of our assets outside of super. We could gear up more and take on more debt, and will do that if/when our assets go up enough that our ratio is down to 1/4, but why add on the risk if you don't need to?
"Three things ruin people: drugs, liquor and leverage." Charlie Munger
You must have skin in the game - shares are a beautiful thing with a sometimes nasty bite
The real benefits (and risks) of shares comes when you have lots of money. A 10% increase on $10,000 might pay your rent for a couple of weeks, the same % on $1,000,000 might pay it for 4 years. When you start off investing you probably only have a small amount of money, but you definitely have bills and unforeseen expenses that can come out of nowhere. So why trade off the flexibility of cash in the bank for investing in something volatile and not as easy to access like shares if the rewards aren't very big?
Because you need to take your bruises. The most important aspect of investing in shares is to train yourself to be able to ignore the entire world telling you that you must sell your shares. This happens VERY regularly. There is always a reason to sell, and the media and your well-wishing friends/families/acquaintances will look very concerned when they tell you the sky is falling.
Seneca: "Be deaf to those who love you, they pray for bad things with good intentions."
If you start investing $1000 per month, every month, for 5 years in shares there's around a 1 in 10 chance you will have LESS at the end than you put in. There's also a good chance you will see your investment reduced by 20% or more in that time period, with a small chance you will see half your savings disappear. This seems like a horrible outcome, but this is actually a good thing. This is your training! When this happens you ignore the media and don't listen to anyone telling you anything about selling shares. This is your discount sale! Would Maria sell the Urban Coyote clothes she already has when they are having a 20% off storewide sale? That would be crazy. Same thing applies here. You can make a little "hrumph" sound, but do no more. Don't sell, keep buying. Stick to the plan. Once you've done this a few times it DOES NOT become easier, as you will likely have much more money at stake. Felt like you got punched in the stomach when you saw your $10,000 turn into $6,700 during a 33% decline? Try watching $600,000 turn into $400,000. If you stick with the plan one day you will. But it will become easier once you've done it for decades, as odds are the numbers become so big that in reality they don't really matter? $2,000,000 turns into $1,340,000? That sounds horrible, but to get to that point you would have made a lot of gains along the way. This is the essential part. Investing takes decades of practice, some big losses, and hopefully some much, much bigger gains. It's inhuman not to worry about the potential for some big losses in your investments, but every time you do you have to invert and think about the alternative - the potential for big gains. If you are worried about losing money in the next year remember this: In the last century USA and Australian shares have been more likely to go UP more than 20% in a year than go down by any percentage. When shares go up they tend to go up HARD AND FAST. It is common for investments to go up triple or more in a decade. In the last 50 years the average annual return for USA shares over a 10 year period has been 11.18% per year.
That is nearly tripling your money in a decade. Think about tripling your money every 10 years means:
In 10 years your original $10,000 turns into $30,000
Ten years later that $30,000 is $90,000
Ten year after that your $90,000 is $270,000
Ten years after that $270,000 is $810,000
Ten years after that and the acceleration has really happened - your $810,000 is $2.43 million
That's if you don't add any money at all after the original $10,000. But what happens if you consistently save and invest some of your money into shares? What if it is just a relatively small amount? Maria decides to invest $1000 every month into shares for the next 19 years (bringing her to age 41 - wonder why I chose that age?). Let's look at two ways that could work out:
1. She has HORRIBLE timing! Maria starts investing at the end of the tech bubble in 1998 so gets none of the rapid rises, then gets hammered by the GFC in 2008 where her investments get cut in half again! She doesn't take notice of any of this and just invests her $1000 every month until the end of 2016. At this stage she checks and sees that the $228,000 she has invested over this time is now worth $629,000. Even adjusting for inflation it is worth $420,000. Out of curiosity she compares it to what she would have made if she had saved it in a bank account earning the average interest rate over that time period. It would now be worth $319,000, which doesn't sound horrible...except when you adjust for inflation it would be worth only $213,000 which is LESS than the money she had saved and invested. Even in this horrible timing situation, which is one of the worst in history, the outcomes were still very good for shares.
2. She has GREAT timing! Maria starts investing in 1980 (the greatest year for things to be born - I wonder why I picked that one?). In 1998 she checks her account and it is now worth $1.97 million dollars. Even after adjusting for inflation it is worth $921,000. Interest rates were higher back then so had she been in cash it would have been worth $635,000....but interest rates were higher because inflation was too. Adjusting for this it would have been worth $297,000. A massive difference.
Moral of the story: If you can hold on for the long-term and handle the bumps in the road you will likely do very, very well regardless of what is happening in the markets. That takes training to see if you can do it, and it's best to do that when you don't have a lot of money on the line. Take your hits when you are young and don't have much money on the line. Then when you are older with a lot more money the big hits don't hurt as much!
"I am not an optimist, I am a very serious probabilist." (paraphrased from Hans Rosling). If you are thinking long term (20+ years) so far throughout history shares are a heck of an investment method.
This is a brilliant set of rules for investing in shares. 20 Rules for Markets and Investing - 2020 Edition - Compound Advisors
This is a great, easy read about investing in shares. He talks a lot about how to get through market crashes and ignoring the media hype cycle. Stock Series - JLCollinsnh