You Can't Take it With You, and You Can't Die With Zero
#stayrich #liverichly Or: how I learned to stop worrying and love the ups and downs of the market.
In my coaching, when I show people the projections for how much money they could accumulate over a lifetime with a high savings rate, many people are happy with the idea. They like the idea of generational wealth, or generally adding to the wealth of humanity. Some, however, don’t want to “save too much,” and I commonly get asked if there’s a way to make sure they save “just the right amount.” Sometimes when I coach people who are retired or already wealthy, they want to spend it all and die with a bunch of uninheritable credit card debt.
Well, I’ve got some bad news for you. No. That’s cute, but it’s not practical for most folks. If you read this blog, you are probably a high income or high wealth person, or at the very least a person on a path to a high income and wealth. For you, any choice you make to save “just the right amount” is a choice to give up free money and make the world a poorer place.1 You like free money, don’t you?
The reasoning is a bit subtle, but let’s step through it. First, I’m going to assume that you want your money to last more than a couple decades, whether that’s for yourself, your loved ones, or a cause you care about. If you have no one that you care to leave your money, then yes, you can spend it all right down to precisely zero. But, also, you’ve got a problem! The most rewarding thing a human can do is to help the happiness of another human being! Go find someone or something to leave your money to!
So assuming you want your money to last more than a couple decades, and you’re still aiming to die with zero, you’ve got another problem. There are very few asset classes that will claim to give you a predictable cash flow that far out, and they are all terrible. The more predictable they are, the more terrible they are! On the other hand, the asset classes that generally grow strongly over the long run are totally unpredictable over the short run!2 So without the ability to know where your portfolio will be, how do you plan to die with zero?
Then there’s the issue of lifespan. In 1950, 50% of all baby boomers born that year were predicted to be dead by the end of 2018.3 In 2021, 74% of them were still alive!4 Say you are aiming to leave your money to your grandchildren, who are now 5 years old. How long does that money need to last again? How could you possibly know?5
But what about that financial advisor who told you in their soothing voice about how if you let them handle it, they’d make sure it was all ok? They’re not lying, exactly. They can probably insure you against going bankrupt. But they’re taking all your free money for themselves and their real clients, the people selling that financial product. You’re not the actual client. You’re the livestock. (I’m sure the dairy cows like the farmer also.)
Let’s say you want to buy the “safest” long term financial product in existence. That’s generally acknowledged to be a US Treasury bond. However, while you will almost certainly receive the exact amount of dollars in return for your purchase, how do you know how much stuff those dollars will buy? Inflation and taxes are a thing, after all. I’m writing this in 2024, and people in 2019 would have sworn up and down that 9% inflation was impossible in the next decade, but year over year CPI hit 8.99% in June of 2022!6
Let’s say you buy a 20 year bond that pays 5%. First, we pay taxes. Fortunately, there’s no state tax on Treasuries, so let’s say that you end up paying 20% as an average tax rate back to the Feds, although readers of this blog are more likely to pay closer to 30%. So now you only get 4% (5 * 0.8 = 4).
But then inflation is a thing as well. You are not a hermit, so you have to pay for home repairs and taxes and doctors and grocery checkout clerks and so on. Their costs are going up, so yours are also! Let’s say that inflation averages 3.5% over the lifetime of the Treasury. So now you are getting 0.5%. Ouch! That’s not much to live on! You’re going to have to spend down the principal and hope you and your heirs die young!
Ok. What about inflation protected bonds? Those are a thing, right? Yeah. Problem is, they pay a lower yield, so we’re right back where we started! Tax exempt inflation protected securities? Even less money, and now we’re having to go to states instead of the Feds to buy our bonds, so we’ve introduced a risk that the state will go bankrupt. That happens! It’s rare, but it’s a thing!
Every time we try to clamp down risk in one place, it bubbles up somewhere else. But what if we buy a whole life indexed insurance policy and overfund it with a guaranteed minimum return and inflation protection and borrow against it so the withdrawals are tax free and then the policy can pay itself back at your death? I saw this super sleezy sales-droid trying to sell me that and my eyes glazed over with how complicated it was.
Look. I’m not going to tell you that those products are always a bad idea. But they are complicated, they usually lock you in for decades, and wow are they expensive! And what’s that insurance company going to do with your money anyway to guarantee that return? (I promise they don’t have a money tree.) Turns out, they mostly just buy stocks or real estate, take a cut, and use the rest to pay for your returns. And that “downside protection”? Their plan is that if the market goes bad enough so they can’t cover it, they will declare bankruptcy and let the government mandated insurance7 fund bail out your policy.
It’s not that that bail out won’t happen. It’s just that in a future where the economy is totally crap and your giant insurance company is bankrupt, what else is going wrong? “Too big to fail” is a thing. But the next category up is “too big to bail.” Just ask British folks who invested in Icelandic banks what happened in 2009. There was literally not enough money in Iceland to cover it, so rather than bail out the British and indebt their great-grandchildren to cover it, the Icelandic government, very politely, gave the British the middle finger and reoriented their economy around tourism. So ask yourself. Who’s guaranteeing your downside protection, and what is their threshold for deciding to let you fail?
I hate to break it to you. I really do. But there’s no such thing as a “safe” investment for the long run. You either take the risk of losing all the digits in your bank account, or you take the risk of your digits becoming worthless even if the numbers haven’t changed.
But have heart! This is a good thing! It’s freeing! It means you can stop chasing the impossible and start chasing the probable! Companies, people, and governments come and go, but the human endeavor is mostly up and to the right! There are crashes and crises, but the history of humanity is one of picking ourselves up and making the future better than the past. We screw up, we work twice as hard as if we’d done it right the first time, and the world gets better.8
So what to invest in? If you want the lowest hassle portfolio, put your money into a broad, no load, low cost, market cap weighted stock market index fund from an issuer who can’t change their fees after they get you locked in.9 Check it once every year or two, and spend your life on things that matter.
If you are still working, I can guarantee it will crash. But guess what? Buy more while it’s on sale! If you are retired, you will need perhaps 5% to 10% worth of “ballast”10 to rebalance in and out of. Personally, I like precious metals or real estate for that. Again, I guarantee that this investment portfolio will crash! But guess what? It’ll come back, and if it doesn’t, it’s probably the end of the world, all money is worthless, and you’ll need to fall back on your backup portfolio of canned goods and bunkers.11 That stock portfolio will, in all likelihood, wildly outperform any sort of “safe” investment. You’ll live a richer life for it.
Real estate can also do very well, better than the stock market, but you will need to get good at it. I call being good enough to outperform the stock market “investing superpowers.” You will need an investing superpower to go beyond stock market index funds. In real estate, this isn’t that hard to do, but it will take some study and some time, and that is a post for another day.
Embrace a little bit of uncertainty! Honestly, most of the risk is “upside risk”12 anyway. If instead of aiming for your investments to be inflexible, you add just a smidge of flexibility to budget year to year, you will be able to pick up that free money.
So lift your eyes to the horizon! No one can guarantee you safety, but I can guarantee that if you learn enough about this subject, you will sleep very well at night, satisfied in the knowledge that you and yours are amongst the most secure humans who ever lived.
Remember, your investment choices matter! When you chose a lower growth asset for the long run, real people make real choices to produce that predictability for you, trading away humanity’s higher future wealth for your predictable returns. Or they just lie to you and pocket the difference.
Mumble, mumble efficient market hypothesis and the efficient frontier. If you came up with an asset class that was predictable with a high return, there would be a mad stampede to buy it, driving up the price wildly, making the return unpredictable again! It would probably overshoot the “correct” value because of momentum traders, leading to a big crash!
Actually, demographers have some surprisingly good projections, but also they seem like total science fiction, so again, how could you know?
Insurance insurance? Meta insurance? This is called reinsurance, and then, at least in the USA, there’s an assumption that the government would bail out the insurance companies if they couldn’t make their payments.
Broad means invests in almost the entire stock market, if not the whole thing. No load means there’s no sales commissions involved. That’s a thing?! Yup, and you don’t want it! Low cost means that it charges under 20 bps (0.2%) annually, and preferably under 5 bps. Market cap weighted means that it just buys an even slice of every company, and a bigger slice the bigger the company is. That way, you only rarely have trading fees or taxes from the fund issuer buying and selling things. And what kind of issuer can’t raise their fees over time? One that’s either a non-profit, or where the fund owns the company instead of the other way around. I won’t directly point to a specific company that has that structure, but do a search for synonyms for “forefront.”
Weirdly, adding a bit of another asset class that does worse on average than stocks can increase your overall returns. Yeah. Let that one sink in. It’s like adding 1 + 1 and getting potato. The reason is something called “sequence of return risk,” and that’s a post for another day, or you can check out the generally acknowledged expert on the matter over at https://earlyretirementnow.com/2024/02/12/100-percent-stocks-for-the-long-run/
That’s a post for another day, but there’s a dearth of clear eyed content out there that helps people understand where the boundary between irrational paranoia and sane preparedness for a wealthy person lies. I’ll illuminate that boundary clearly in the future.
This is investor jargon for, “We’re going to get rich!” I guess it sounds smarter than “stonks go up!”