If you want to win at life, you “save money” by purchasing non-cash assets like stocks.
That's literally how I was taught about compound interest: saving money means making weekly/monthly/annual contributions. And that was a regular (non-honors) class in an inner-city middle school.
> Try convincing a kid with even modest arithmetic skills that saving $2 and letting it compound is “smart.”
No, that's idiotic. I think you're beating on a straw man.
Lord help you if you bought NFTs of Tweets.
Except when you don't.
Between 1995 and 2000 I lived in a student house in the UK and one of my housemates (who was also a student, and from my recollection almost as broke as I was back then) was really into investing into the stock market during the dot-com boom.
He bought both Lastminute.com (IPO March 2000 @ 380p/share[1], sold to Travelocity in 2005 @ 165p/share[2]) and Railtrack (IPO 1996[3], went bankrupt 2001[4])
[1] https://money.cnn.com/2000/03/14/europe/lastminute/ [2] https://www.theguardian.com/technology/2005/may/13/business.... [3] https://www.railwaysarchive.co.uk/docsummary.php?docID=740 [4] https://www.independent.co.uk/news/uk/home-news/railtrack-go...
(Sorry, genuine questions) risk of what and compared to what?
One of many, the housewives who saved money from day to day house expenses, had to come out clean to family that they are holding 1000s of currency in old now defunct notes.
Yes, there's inflation negative yield. But especially in the low interest and inflation rate environment that has been the case until possibly recently, the difference between "cash" (i.e. default investment at a brokerage) and other very low-risk investments (e.g. high quality corporate bonds) has been pretty minimal.
Bet on humanity :)
If you've not watched The Big Short (2015)[0], it's a really excellent film.
Nothing you do in life is risk free, even keeping cash under your mattress: the fact that there is risk involved does not change that this is how you make money. When you know that you’re guaranteed a loss of ~2%, at best, on cash, and that your expected real return on stocks is positive, well… That’s the point.
At least in the UK, buying into index funds was substantially more expensive back then. I held shares in a retail bank for a time not long after that, for which I had an actual paper certificate! No wonder trading was expensive....
When you have a buffer only then you can start buying assets.
Until web brokers started I did not even know how to buy stocks. I think most people still don't know how to buy stocks unless they are from really well-off family.
My parents were also not "financially literate" so I had to figure out all kind of stuff on my own.
Downside was for example that I got supper shitty "investment product" so I did not loos much money but if I knew better I would put my money in a better place.
Fortunately I did not get outright scammed but for a lot of people that have to learn as they go it is a real risk so "just saving" and losing some value to inflation might be best option for many.
Same
I'll be the first to admit to being fiscally conservative: money I can't spend and that is sunk into something else does not guarantee that I get my money back.
I'm losing money on the savings I have every year, which is why I put nearly all my savings into a fund, but then that fund dropped in value almost immediately by 30%, if I had done nothing with my money and bought a top of the line MacBook Pro with 64G of ram, I would have more "money" than I have today; but it all depends on what the value is when I sell out of the fund, there's no guarantee that I'll even get what it currently says I "have" back either.
Savings and investments are different things.
I'm not giving you financial advice - I don't know anything about you or your investment. It just seems fundamentally wrong to me to consider different forms of money (cash, shares of an investment fund, casino chips, etc) as being distinct. Changing forms may have tax implications but it's not like the form protects you from loses in some way. If you keep your money in an underperforming investment it should be because you expect it to go up in the future, not because you are afraid of realizing a loss (which you have already suffered).
A better analogy is stocks vs Real Estate. Let’s say you buy a home for 200k, and sell it later for 300k. Every day in between, when you “weren’t in the market”, the potential value of your home fluctuated: it’s entirely possible that halfway in between, the top bid on that day, were it listed on the market, would have been for 6$.
Of course in reality you don’t see all these intermediate hypothetical prices, but in theory they’re there just the same as if you bought stocks and then didn’t look at prices for 10 years.
The fact that there is a price on the open market (the fluctuation of which determines your unrealized gain/loss) does not obligate you to sell at any particular moment: that’s just like owning a home and not caring how much someone would pay for it on Tuesday vs Wednesday because you don’t intend to sell it in the first place.
> I don't understand the mindset that losses aren't real until you convert them back into cash.
stocks, cash, real estate, etc are all assets, but they behave very differently. in particular, there are some very special attributes to cash: it can be directly exchanged for almost any other type of asset, and the prices of those assets are almost always denominated in cash. simple example: my lease says I owe $1000 each month in rent, not $1000 worth of any asset, but cash specifically. if I have $10k in cash, I can definitely pay rent for the next ten months. if I have $10k worth of some s&p 500 ETF, I a) can't pay rent without converting to cash first and b) risk being forced to sell at a time when my shares are worth less than $10k. I have a good chance of making rent for roughly 10 months, but there's a lot more that could go wrong. of course, cash itself does fluctuate in value just like other assets, but we are mostly insulated from that in the short term by the fact that most legal agreements are denominated in nominal dollars, and that the prices of most material things are much stickier than financial instruments. in short, this is why the concept of unrealized vs realized gains/losses makes a useful distinction.
> It just seems fundamentally wrong to me to consider different forms of money (cash, shares of an investment fund, casino chips, etc) as being distinct. Changing forms may have tax implications but it's not like the form protects you from loses in some way.
nothing is 100%, but different assets have sufficiently different risk profiles that it's worth distinguishing between them. cash is an extremely safe asset in the short term, but almost guarantees a loss in the long term. if you can identify buckets of money that you probably won't need for a long time, it has historically been a good bet to invest them in bonds/stocks/whatever based on your tolerance for risk. it doesn't guarantee a good outcome, but it avoids the guaranteed bad outcome of holding a lot of cash for a long time.
> If you keep your money in an underperforming investment it should be because you expect it to go up in the future, not because you are afraid of realizing a loss (which you have already suffered).
agreed, and this is a common mistake that people make. but this is more people applying the sunk cost fallacy to the concept of unrealized vs realized than an issue with the concept itself.
The interest in my savings account is laughable. It's marginally better than keeping in a mattress.
The mattress doesn't charge bullshit fees. The mattress doesn't arrest you for being the wrong color.
I would think in a situation like that, we would have something similar to what happened to job losses and the stock market cratering like in March and April 2020. Except that cratering and job losses would continue while riots and protests all across would get bigger and bigger. Crime presumably would go up a lot too.
It slips out that your family has $20K in cash at your home…who knows what’ll happen in this dystopian situation.
In case of the banking system collapsing in a modern developed country? That’s such an extreme situation I’m not sure if holding cash would be the right hedge against it. That sounds more like a canned food and flour bags kind of time.
If a bank fails, the deposit insurance also fails and the government can’t step in either that will undercut the trust in all other banks too. I would expect a chain reaction of follow-on bank collapses and hyper-inflation.
It's a common occurence u developing countries, people hedge against it by holding foreign currencies and tangiable assets like land. Its not that rare for people to live through multiple devaluations and currency collapses. Ofcourse you don't go around telling people about tour wealth
Yes assets like land would help. However with banks failing like this, someone with more guns and aggression than you or I could come to our homes and take them from us in areas where LEO are not being paid and thus not doing anything.
With the failing banks and such, tracking down who owns what will be much more difficult when things get better. Changing failing bank documents can’t be the hardest thing in this situation.
"Win at life" == "save money" == "owning stocks" ???
Winning at life is about everything that is not about money. Winning at life is being able to be happy no matter how much or how little money you have. Sure, up until one point, more money can help you get happier, but if you don't have the baseline happiness, you will never become happy and "win at life" no matter what. And up until a certain point, not even more money can make you happier if you're already miserable.
We’re talking about money, in a thread about money, on a post about money. At no point did I suggest that money makes unhappy people happy.
And I think you did not mean "win at life" in as broad a sense as the other person interpreted it. Either that or you two have very different ideas of what "winning at life" could mean.
How do you imagine that happening? Does it look like to you that the west is going to loose so bad that all the investments loose their value? Or you are banking on a nuclear winter?
Bonds aren’t great for building wealth. But they’re fine for preserving it. Saving money via a mix of inflation-indexed and fixed-yield debt will generally preserve your purchasing power over long time intervals.
Most of the world has seen bond owners get eaten almost completely really. Almost all of Africa, large swathes of Asia, much of Europe including Germany and Russia, most of South America...
Were any of these seen, contemporaneously, as low-risk?
The backfire sovereigns in the last 100 years were limited to Austria-Hungary and the Dutch, trading economies derailed by war. The others aren’t trading nations, or were well-established basket cases when they issued their debt.
Just be born wealthy enough to have free money to invest as a child!
The reality is, most people barely can meet their basic needs. If you hate that as much as I do, then vote for politicians that care about wealth inequality.
Bad part they are mostly scammers or charlatans that are looking how to get that money for themselves.
I should say that I also don't think this is the best description of how prices actually move, and over the years since I've read the book, I have come to no longer believe in the EMH. That being said, I do still think pointing people in this direction in general is the best thing I can do: even though these ideas will only take you so far, they remain academically productive, interesting, and useful... And most people would do better to approach the markets with more humility and less confidence. Those who are nerd enough to go beyond the EMH will undoubtedly do so on their own and at their own peril. :)
The book is very much in the tradition of Benjamin Graham's The Intelligent Investor, Warren Buffett's value investing style, etc.
The reason to do long form math on paper is to get a feeling for the mechanics of math so that you can extrapolate it to more complicated math. The reason to save is that there are minimum barriers to cost for investiture in capital, and capital pays dividends and grows in a way consumables don't (unless it doesn't! Nobody wins in a civil war).
In many rpgs as you progress through the game the need for expenditure diminishes to zero. Different case if it is mmo or designed around grinding though.
[0]: https://www.desogames.com/virtual-labor-and-lessons-from-eco...
What if it never makes sense?
One thing I didn't realize until embarrassingly too late in life is that savings should only function as a buffer for emergencies. Anything else is just burning your money since there haven't been savings accounts that consistently beat inflation even in the US.
I was fed these same myths as a kid, and earnestly believed that part of success in life was to have a huge savings account one day. I remember well all those "power of compound interest" talks in grade school, about how working hard and saving was the path to wealth. But that's all a complete myth.
The real irony is that anyone who has built themselves serious amounts of wealth typically does so by making high risk/high reward choices. Teaching kids to play it safe and building saves, different desires to the future etc. doesn't make any sense in the world we live in. It's ultimately bad advice. No one I know who ended up very successful did so by living conservatively and within they're means. They're people who aggressively pursued improving their conditions, often times because they were forced too precisely because they didn't have a savings.
The lesson of "save money, life within your means and make conservative choices" sounds nice, but in the world we live in today this is a recipe for short terms austerity and long term decline.
You have the logic backward. If it was "typically, anyone who made high risk/high reward choices has built themselves serious amounts of wealth", it would be good advice, but what if most of those people failed terribly? An example is pursuing a career as an artist/sportsman which are common high risk/high reward aspirations of children which most people fail at.
I also had that same late lesson in saving being useless. Luckily, I learnt it by buying a house which appreciated fast and showed what a disaster savings would have been.
The better way to learn this is to be able to look at a graph like this: https://inflationchart.com/spx-in-m3 understand it, and make an informed decision taking in to account your personal risk tolerance.
This also seems like bad advice. You can aggressively pursue higher earnings and simultaneously spend conservatively (on anything that does not contribute directly to higher earnings). You seem to be setting up a false dichotomy.
That said, I agree that at least in free market economies, high risk / high reward + tremendous luck is a requirement for extreme wealth generation.
Kind of an extreme way to live but it used to be possible.
It is I think as important to teach children how to spend their money, on what, and get them used to understand how much they got for their money.
As a kid I saved for a long time to buy an Atari Jaguar, and it was a eye opener looking back at the “sacrifices” I made for that result.
SPEND: They are encouraged to spend 1/3rd of the money. Whatever they want to buy. They have become online discount shopping experts, whether getting rubiks cubes, roller blades or harry potter merchandise.
SAVE: 1/3rd goes into savings, which we will let them tap once they need it. Not sure when: once they are 17/18 perhaps? In all cases, it will be a big payout compared to the amounts they are used to "spend".
CHARITY: And 1/3rd goes to charity envelop. So whenever an opportunity comes up, they can use that towards any charity event. Good thing is that they usually spend it all in one go. Great!
0: https://twitter.com/CNBC/status/1076173906455810050?s=20&t=Z...
See: Bill & Melinda Gates Foundation, etc.
How is that foundation exploiting the first step, in practice?
LT - 40% ST - 30% Spend - 20% Charity - 10%
I don’t recall what the term was for short term, maybe a few months.
Something about it worked. Today I follow a similar system, tho percentages are different (spend obviously higher) and no charity.
https://www.socialvelocity.net/the-problem-with-nonprofit-ev...