Long-term investing is hard without discipline. One of the biggest problems I consistently observe is people's inability to control their spending once they start making money or a lot more money.
We all know someone who is making the big bucks, yet is just living paycheck to paycheck (see: Scraping By On $500,000 A Year). After three months of grueling work out of college, I decided to buy a new used car. Not only did I get a car that was parked several subway stops away for $200/month, I also got a brand new motorbike!
What kind of 23-year-old dumb ass idiot buys a car and a motorbike when the subway system in Manhattan is so efficient? My base salary was only $40,000 and I was trying to save money by living in a studio with my high school friend. But I couldn't help but buy the two things I always wanted since high school. Thankfully, I got a bonus which allowed me to max out my 401k and save something extra. But I could have saved much more.
After I left Manhattan for a competing firm in San Francisco two years later, I promised to start fresh and seriously clamp down on my spending. I got word my job was at risk due to the dotcom collapse, so I felt I had dodged a bullet by escaping the east coast.
Disciplined Investing Is Long-Term Investing
After two years of working in banking, I knew I wouldn't be able to last for an entire career. Therefore, I saved like a madman. 100% of each bonus was invested. And my spending was kept to a minimum by living in a crappy 2 bedroom, 1 bathroom apartment at the edge of SF's Chinatown with a mentally disturbed person I met on Craigslist. I eventually got a car, but it was a seven-year-old Honda Civic I bought off my mom for $7,200.
Based on my consumption habits in Manhattan, I knew I wouldn't be able to properly control my spending once I started making more money as an Associate and beyond. Therefore, I began investing ~20% of my after 401k savings in 5-7 year CDs, ~50% in real estate, ~10% in private equity, and the remaining ~20% in stocks each year.
Because I worked in the financial services industry, it was important to diversify from just stocks given my career and compensation were closely linked to the performance of the stock market. But what I realized about my stock investments was that I didn't have the patience to hold onto securities long enough to make meaningful returns.
Day Trading Way Too Much For My Own Good
Instead, I would buy and sell stocks to the point where the department head called me into a meeting to ask whether I had a trading problem. Apparently, I racked up $12 million in trading volume one year compared to the next highest employee who traded $5 million in trading volume!
I apologized for my day trading behavior, even though it was perfectly within the rules to day trade index ETFs, and promised to focus on my career instead. That meeting with the department head was the turning point to start investing everything outside of my 401k into private investments and real estate. If I had continued trading so aggressively, I probably would have been laid off.
Investing For The Long-Term Is The Best Way
As I look back on my investments, the biggest returns are those that I've held the longest. San Francisco real estate is up about 5-6% a year un-levered since I first invested in 2003. With a 20% downpayment, we're talking a 25% – 30% a year return. Then there was my 10-year investment in Bulldog Gin that has annualized an estimated 15% annual rate of return. Finally, there's a 7-year duration mortgage backed securities fund I was forced to invest in during the crisis that has annualized 24.5% a year.
The S&P 500 has annualized roughly 7% – 10% including dividends since the beginning. Not bad in comparison, but actually not as good as any of my real estate or private equity investments. Sure, investing in the S&P 500 has potentially less risk (still went down big in the crisis), with pure liquidity. But who knows, I may have panic sold during the downturn since it's so easy to click some buttons to get rid of a position. Plenty of people sold and never recovered!
Related: The Inflation Interest Rate Paradox: Why You Must Continuously Invest
Saving Yourself From Yourself
Investing in private funds, long-term CDs, and private companies basically saved me from myself. I still ended up hurting my net worth with my vacation property purchase in 2007, but it could have been much worse. When there is a 7 – 10 year duration for each investment you end up doing the following:
1) Tighten up spending.
The more you accumulate, the more tempted you will be to spend the money sitting in your bank account. When you lock money up in a long-term investment knowing there's a penalty for early withdrawal, you won't go blowing it on a ridiculously priced car, a crotch rocket, or other superfluous things you don't need.
The feeling is similar to purposefully making yourself poor in order to stay disciplined. Compared to the typical consumer who spends most of what s/he makes, you're not only not spending, but you're also likely earning a return that will create a widening wealth gap over time.
2) Staying calm during a downturn.
When you're locked in, there's nothing you can do. As a landlord, your main concern is receiving a steady rent check. It's too hard to sell property in a cratering market. As a private equity investor, you're mainly concerned about whether your company makes it past the dip.
Luckily for Bulldog Gin, they were able to raise another round of financing after the crisis. With CDs, you're just collecting your guaranteed income. When you know you can't sell with ease, the panic starts to disappear.
The reality is, your investment risk profile is probably different from how you actually invest. As a result, it's important to conduct a thorough financial checkup every year to make sure you're aligned.
3) Experiencing windfall surprises.
Given your investments are so long ago, you tend to forget about them. When the funds finally expire or your private equity investment finally has a liquidity event, it's kind of like winning the lottery because you've been living without such funds all this time. In Feb 2014, I had a nice six figure windfall because of an expiring 5-year CD. I used $260,000 of it for a downpayment on my Golden Gate Heights fixer. If I didn't have that windfall, I don't think I could have afforded my current home, which would be a crying shame because I love the place so much.
The surprise windfall is a very similar feeling to getting a “surprise” tax refund. Even though the money has always been yours to begin with, it still feels nice when the money finally returns home. With long-term investing, the feeling is even better due to a return.
For those who are undisciplined with money, I highly suggest looking for investments where you can lock your money away for years. Not only will you quickly adapt to living without such funds, you'll also get motivated to earn more money to make up for your lower liquidity. When it's finally time to collect, you probably won't even need the money!
Here are some examples of long term investments I've held:
- Two Venture Debt funds expiring in 2020 – 2026.
- Various zero coupon municipal bonds expiring in 2021, 2022, 2023, 2024, 2025 with a 3% – 4% yield.
- 4.1% yielding, 7-year CD.
- 3.75% yielding, 7-year CD.
- Fundrise Heartland eREIT or a venture capital fund to find the next Snapchat.
- Tech stocks like Google and Apple, which I've held since 2012
The goal is to consistently lock my money up each year to create a perpetual windfall machine. It's been years since I last went on a foolish spending spree. But as I enter my 40s, I'm afraid my old habits will return!
Invest In Private Growth Companies
Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out the Fundrise venture product, which invests in the following five sectors:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 55% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI! Investing in private companies is all about long term investing.
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. Personally, I've invested $150,000 in Fundrise Venture so far to gain more access to private AI companies. Fundrise is a long-time sponsor of Financial Samurai.
I remember the 2008 crash fondly (in regards to stocks only!). I had just started my first 401(k) and thankfully had the frame of mind to realize that buying cheap now will pay off big in the future.
My then manager was clueless and stopped all of her 401(k) contributions. She was the Finance Manager btw. There was no argument that could have convinced her that she shouldn’t pull out of the market. The market was down so she stopped investing.
There always seems to be a lot of chatter about the next crash being around the corner. I look at the possibility as a way to further prop up my retirement savings by buying as much as I can while the market is down. And I’m wondering how many people need to be saved from themselves during the next downturn.
I have to share that it is MUCH easier to hold on and invest if you start out with not too much. It is much more difficult to continue doing the same thing if you’ve got a large 401k.
You’ve seen a fantastic rise since you started contributing. A key is to never confuse brains with a bull market, b/c all markets have correction periods!
I try to make myself “feel” poor by getting things into investments as quickly as possible because so many things are tempting. If the money is not in my bank account, I can’t spend it. Helps a ton.
Good article Sam. While purportedly not as efficient as indexing, this is one of the reasons why I chose to move from indexing to diversified portfolio of dividend stocks, with a sectoral tilt towards defensive more than what S&P 500 has. I compare the two investing strategies on my website. At the 2000 and 2008 recessions, I felt sick to my stomach to see my index funds decline so much but thankfully did not sell, so that saved me when the recovery happened. Those were the times I noticed the defensive stocks declined less than the index, so I see this as more conservative strategy than pure indexing. Of course, a potential downside is you may have less gains than index during a raging bull market. That’s ok if your nest egg is large enough to support your income needs, you don’t need to chase high total returns.
Long term investing really is the only advantage that the individual investor has over the big guys. Information, access, better technology and fancy accounting all favor the professional. The need to make quarterly numbers is their only handicap.
If you can focus on what you need your investments to do for you and your specific situation it helps to block out the market noise that may deter you from your path. Certainly “locking up” money that you don’t have an immediate need for so that there is a large barrier to access is a way to do this. Unfortunately I think most people don’t get far enough or to a big enough nut to make these kinds of investments possible or worthwhile.
The best and most basic advice that actually helps is having a written plan. Thought about at a clear and calm time with the intent to refer back to it when the market is not going your way.
It’s easy to think “I’ll diversify and buy more when the market tanks 40%” is different then having a written plan that says: the market WILL tank 40% at some point and at that time your actions will be x, y and z because that meets these needs and achieves these goals for you.
I don’t know what’s more mind blowing: your salary just starting out as an investment banker (I’ve heard stories of people making six figures a year out of college), or how you were able to get such high rates on CDs opened 2010-2011.
One thing I’ve noticed is that, more than a downturn, people can’t stomach a lack of liquidity. I’ll see folks with $200,000 in their savings account that won’t put $75,000 into a fixed annuity because “I don’t want to lock up my money”. This is in spite of the principal guarantee and ability to liquidate their annuity at anytime without principal penalty.
Great article, Sam! If only our consumerist culture focused less on consumption and more on long term investment.
Sincerely,
ARB–Angry Retail Banker
Yes, we tend to be our own worst enemies. Luckily, you learned this lesson at a young age and were able to make the necessary changes to save you from yourself. I love the honesty in this post and I’m sure it is something a lot of us can relate to. Have access and ability to trade funds regularly was not working for you, so you found a new way to invest, build your net worth, while protecting yourself in the long term. Very, Very well done!
Bert
People should feeling pretty good. The current market is cheaper than 1987, 1997, 2007. The only risk right now is the lack of integrity up top.
Hey Sam — nice job… you’ve truly captured the influence of society on all of us. From the time I entered the workforce I’ve “spent” every dime I’ve earned. I’ve forced discipline upon myself by automatically depositing money into my Roth IRA and 401(k), and now also into a brokerage account. Otherwise, I’d probably find something to spend it on — with advertising everywhere, its easy to justify buying pretty much anything.
Lately I’ve been investing long term in sector ETFs. My business website helps to keep me disciplined since all my moves are entirely public knowledge!
I love buying stocks during difficult times. Like Warren Buffett said, you gotta “believe in America”. The U.S. has bounced back from every major bear market. So if the stock market is down 50% and you diversify, by the time the stock market rebounds to old highs you’ll be up 100%!
Isn’t it great how easy it is to get rich? Which stocks were you investing in during the downturn?
I have a long-term investment horizon and invest in mainly index funds. I’m trying to pay off my student loans before venturing into other asset classes such as real estate. I would like to think that I won’t be my own worst enemy when the next bear market and/or recession hits.
I do like the idea of adding other long-term, more illiquid investments to my portfolio once I’m free of my student loans.
We were lucky. We bought a number of large individual stocks at the end of 2008 when everything was crashing. Then we sold out a couple years ago when I just didn’t have the stomach for it going down when I was taking off work to have our last kid (I wasn’t sure if I was going back and I wanted cash to get through it). A year later we started buying back in with index stocks and now just set aside our cash every month. In fact this week it’s on my to-do list to go through our budget and increase the amount we’re setting aside.
All of this is our taxable. Being young we are both fairly aggressive in our retirement accounts in mostly stock index positions and that is where most of our net worth is.
I gave up investing in single name stocks because I didn’t have the discipline to ride out dips. I am really glad I saved myself from myself by giving that up because I only lost money when I wasn’t long-term focused. I’ve done much better since I started investing in ETFs and so far haven’t been tempted to sell my positions even when the markets have gotten ugly. When downturns get me anxious I do my best to remind myself I’m investing for the long haul and use those opportunities to add to my positions instead of sell.
I do spend more now than when I was in my early 20s and making less, but I don’t consider myself a reckless spender by any means. I spend more on things like higher nutritional food, services, mortgage vs rent, and technology which I mostly use for work. I also have made sure that I save a lot more now that I’m making more. Saving and watching my investments grow can be very addicting.
I truly believe the most important characteristic of a successful investor is emotional control and some people just do not have it no matter what. They NEED a strategy to prevent this from clouding their judgment. Your recommendation of locking into long-term investments is one method (and is a method the majority of people inadvertently use by buying a house with a mortgage), but that’s not too easy if you’re an ETF investor like we are.
My wife and I have a dynamic where I’m the one who manages both of our money and she is happy to have no involvement (in terms of our investments). We both know my wife would be unable to stomach a downturn in the market (we’re 90% stocks) so it’s best she has no idea when it happens and how much we’ve lost. For example, we recently went to a casino and lost $20. She was devastated and ended up walking out crying, begging to go back in to win it back….
I guess you could say this is our strategy of saving ourselves from ourselves, I know I can stomach a market crash because I know stocks always go up long-term, and we’re in it long-term.
We also recently just had to deal with the “lifestyle creep” you mention. My wife got a 75% pay rise this month (new job) and the temptation to spend all of that on “stuff” is difficult to manage. We sat down and reviewed our financial plan going forward and allocated the money largely to investments and partially to variable costs like travel. I think the important thing is to not lock yourself into fixed costs like renting a more expensive place or buying a new car from pay rises, as you quickly expect these luxuries forever and it’s hard to go back to not having them. You can always adjust your budget for more variable costs if you’re disciplined with money, so allocating more to travel is fine as we can just reduce this later if necessary.
It’s definitely difficult to not increase your lifestyle expenses when you get such a huge pay rise, but the payoff down the line is insane if you invest it all. We’ve shaved an estimated 5 years off of retirement thanks to investing the majority of this pay rise as opposed to increasing our lifestyle.
I think we’ve all made some stupid decisions when we were younger. Unfortunately, it’s those financial ones that can hurt the most.
I’m going to try to do everything in my power to instill a good amount of financial knowledge on my daughter in the hopes that she skips the stupidity (to some degree) while a young adult. That alone may give her a major head start in life.
Your idea of locking away some of your money makes sense in some scenarios. For the time being, I actually get pretty excited when things turn to $%# just knowing I’m buying low. However, I’m sure that’s because I’m not living off (or using any of) my investments right now. Once that changes, I’m sure I’ll be changing my tune! :-)
— Jim
Sam, you’ve mentioned the Fundrise Heartland eREIT several times across different posts but it sounds like you haven’t committed to an investment yet. What’s keeping you from doing so?
More research and more funds. I’m talking to one of the people today about the refund for other lasting questions. I’m also waiting for a couple liquidity events to hit my bank account at the end of this month and early next month. They are my bulldog gin investment and my mortgage back securities investment made in 2010.
I like to know exactly how much I will be getting from both after taxes before I make an asset allocation decision.
I love the idea of making yourself poor to as a method of enforcing discipline. I hadn’t considered it in those terms, but that’s exactly how I manage my day-to-day finances. I maintain a relatively low cash balance in my checking account for my regular operating expenses. Beyond that I try to put my money in a place where I don’t see it every day and don’t think about it. Even though I know I have liquidity options if the need were to arise, I don’t live as though that money is available to me because I basically forget about it.
Great Post.
I don’t think you have to worry about old habits returning. You have developed stronger and smarter habits as you matured, learned and gotten smarter.
We were in a similar scenario. We did some stupid things years ago but righted the ship, initiated and adhered to a long term plan. The plan has performed beyond expectations and we could easily spend greater amounts outside of our L.T investing and still accomplish any remaining goals.
Aside from the occasional gaming trip to the craps tables; neither one of us wants to spend more. We live a comfortable, happy life with current consumption habits and see no need.
The L.T. plan continues because it’s now built into our DNA. Maybe some people think we are dumb and we should “enjoy” more consumption – It would be hard to do.
Great idea. Locking your investment away for a long time will prevent you from dipping into it. Most of our investments are somewhat liquid, although I really hate to sell them. I’m thinking about muni bonds, but the rate still seem really low. We’ll check it out more.
RealtyShares sounds good too. I invested a bit this year and will add more if things go well.
Loved the clip. It took me back to my days on probation in Big City PD. One of my FTOs was a legendary D-Bag. We hated each other. Aside from despising me, his other favorite pastime was Day trading.
We spent most of each morning watching him lose money and I loved every second of it.
Index funds: set it and forget it!
This article really resonated with me. When I was a younger person starting in the back office working at a major investment bank, I set up a trading account and would go wild with buys and sells. I was also part of an investment club, which was all the rage at that time. I had tons of fun both ways, but honestly I don’t remember actually making any money doing either. The interesting part is that at that time, I had very little money, certainly nothing in retirement plans. Now, I am in my late 40’s and have a pre-tax balance of $1M and post tax balance of $800K in cash and securities. I do absolutely no equity trading at all, instead am in index and some actively managed funds both pre and post tax. Funny, but I guess you do get wiser as you get older.
I am curious to see how I will perform during the next bear market. The last time I had very little invested, I wasn’t doing my own investing, the money was in India and I was here, and I ignored it, because I had already been ignoring it, because at the time I ignored all things money. This was a good move, but I can’t take any credit for it.
I’d like to think that I’ll hold strong and ride it out. I hope I don’t turn into a headless chicken and attempt to sell it all. At the very least I hope I’ll remember to come here and declare my intentions before I hit sell so that you and the rest of your readers can smack some sense into me and save my ass.
Great post. Last year, refinanced 4 investment properties from 30 year mortgage down to 15 year at 3.375 rate and properties still cash flow comfortably A year later, I have $125k in forced savings. Sadly, that $125k would have been frittered away if I had not committed myself to the 15 year. This year, will put 2 more investment properties in 15 year mortgages. Also, love the point re working harder to find ways to make up for the lost liquidity. Forces you to be more financially disciplined.
my company makes me preclear all trades with my managers approval – also I have to hold securities minimum of 30 days – this ensures I never am tempted to have a short term view.
This is the exact reason my goal is to be 50% real estate, 50% stocks/bonds. I need to have a large amount locked up and hard to sell, I know my personality!!
Do you still have the desire to trade frequently? It is wild you were trading that much more then the next guy! As a doc I have no desire to see more patients when I get home and so I wonder if you feel the same way with trading now. Keeping it simple is what I am trying to do.