Middle-Class Millionaires — Page Three

Tasha’s Story of Finding Life Purpose (Letter to Rob) — ”I Woke at 4:00 am and Stared at the Wall for 20 Minutes”

“I woke at 4:00 am and stared at the wall for 20 minutes before turning on my laptop to surf around looking for info on becoming debt-free and financially independent. I found you through a series of Google searches on financial independence. For my third search, I entered “what does financial independence mean? At the bottom of the third Google page, I clicked on “8 Paths to Financial Independence,” which brought me to your well-thought-out, respectfully written piece at PassionSaving.com.

How to Retire Early“Thank you for doing what you do. I am a [thirtysomething] woman starting out at the very beginning to define my financial goals and plot my steps toward achieving them. No doubt I will find valuable information on your great site, as I already have….

“I plan to continue reading and researching, planning and taking action in a Passion Saving spirit. I look forward to living out my plan and hope to contribute my thoughts to your blog at some point.

“Overcoming doubt is a biggie. But I am working on ways that will change my perception and eradicate fears. Once I see the proof of my savings in action, it should get easier. Thanks again for your contribution!”

Rob’s Comment: I am not a person who totally buys into the idea that, if you visualize something, it will happen. I believe that there is something to the idea, however. The reason why it often works is that visualizing something prompts you to think about it and thinking about something leads to planning for it and planning often generates amazing results.

Things that bother you only a little bit rarely provoke action. You just learn to live with those sorts of things. Things that cause you to stare at the wall for 20 minutes at 4:00 in the morning prompt action. Those are the problems that come to be viewed as priority problems. Those are the problems that your creativity comes to solve in time.

There have been a number of times when I found myself staring at the wall at 4:00 in the morning. In no case did I bring myself to that place by choice. In every case that I can recall the experience led me to something good down the road. Pain is a motivator.

Another way of saying it is — You gotta suffer to sing the blues!

Mary’s Story of Finding Life Purpose (E-Mail to Rob) — “I Now Live on SS and in HUD-Subsidized Housing…But My Time’s My Own”

“I’m an INFJ, too–though I test these days as INTP. You are correct that INJFs care nothing about money–unless life’s events force it. If you’re a family man, not caring is not an option. I myself came to the opposite conclusion. I just up and decided–with a flash of Great Insight–“money isn’t even real!” And I forthwith dropped out of the commercial world. Walked out of my “job.” I moved back to New England and lived with various friends for five years, and now I live on SS and in HUD-subsidized housing. Medicaid for healthcare (the best healthcare I’ve ever had!) But my time’s my own, and I’m writing a book showing how we can have as sophisticated a commerce without money as with it. It’s not utopian philosophy, nor is it sci fi. I take this bitter subject quite seriously; we don’t have to do things the way Adam Smith saw it. It’s not the only vision. The trouble is, the vision Smith gave us is so pre-occupying, we don’t have mental space to develop the others.

“One of the things I need to document, though, is what the size of the population is who go to work every day hating their jobs. You sell freedom from money. Which means, jobs they don’t like, right? (Otherwise, they don’t need to be free from money–if they like their jobs, money’s just a gorgeous happenstance.) What’s the size of the unrest out there? Your tack seems to be capturing some attention. I wonder whether your Readers would care to respond to that thought?”

Rob’s Comment: My sense is that it is a small percentage of the population that hates its job and a small percentage of the population that loves its job and that most fall somewhere in-between. I believe that people have a deep need to find fulfillment in their work and that this need is often frustrated today because people have too little control of the details of how the work they do is accomplished. Nurses are the grpup that come to mind immediately. I have seen a good number of nurses who love what they do in a general sense but who feel compelled to spend a lot of their working lives filling out paperwork. Teachers are another group that I view as often frustrated. There are others.

Early Retirement Planning

I want people to be able to spend less time earning the money they need to stay alive so that they can do more important work. If people choose not to work for money, it doesn’t mean that they are not working. It means that they are spending their life energy pursuing quests for non-financial reasons. It could be that in some cases they are just getting into trouble. But it could be that in other cases they are doing heroic things. If you use money effectively, you gain back control of your time. I view my site as a big advertisement for a wonderful but too often overlooked good called “Time.”

Patricia’s Story of Finding Life Purpose (E-Mails to Rob) — “From Shattered Dreams of Early Retirement…to Reassurance from Quantitative Research.”

“Thank you so much for making your research and insights available to us. I have thoroughly enjoyed reviewing your commentary in the website and playing around with simulated scenarios – I’ve gone from shattered dreams of early retirement to glimpses of hope to reassurance from quantitative research. I commend you for putting together such an interesting and useful website.

“Both my partner and I are in the late forties, are both professionals, and have enjoyed a great standard of living in the sense of not having to worry about financial matters. We are definitely not the ultra-rich but, likewise, never had to worry about sticking to a budget. However, this has been achieved by both of us working. Perhaps, a typical double-income trap.

“Our financial net worth (excluding home equity) is $1.5M with a fully paid mortgage. We have three kids (twins of 12 and a boy of 16).

“The dark side of this is that the lifestyle and our savings have been dependent on two incomes, and due to the weak economy plus a rather unfocused career (plus my age!), I am getting to the stage of finding it hard to source an income (I work as a consultant so my salary is highly variable). My dream has always been for me to stop working by the end of 2009 when I hit 50, and only do a small amount of teaching at university while my partner would phase out his job by 2012 at the latest, at the age of 55.

GIven my family configuration, cashflow requirements are quite high so I cannot see my savings nest being able to support us, say, 40 years from now plus leaving something behind for the kids. Your calculator clearly shows that.

“On the other hand, I know that many families can live with half of our budget without necessarily dropping into a miserable lifestyle. But, I am not sure whether we know how to do it – although we are a family of savers, we don’t really know what “sacrifice” means.

“In all this, the positive aspect is that the intelligence behind your retirement analysis, plus that of those who have applied Monte Carlo simulation, plus W Bernstein, plus the Trinity studies, etc. empowers me to really understand the potential scenarios. They give reassurance that the plans that I may be making are supported by analysis, research and evidence so I may know what I’d be getting into.

“To be perfectly honest, I’ve been quite fed up with retirement books that oversimplify matters. For example, I flicked in the library a book under the title “20 Good Summers”, which clearly says that the “number” is 10 to 12 times the annual expected withdrawal, implying a return of roughly 8.5% to 10% year in, year out. That sort of nonsense is risky and damaging. The other day, listening to Dave Ramsey, he said that because the typical diversified stock fund has had an average performance of 12%, then what people need to do is to save to the point when the 12% interest is sufficient, implying that the withdrawal rate is 12%. That’s the sort of guy who scores in the iTunes store as the most popular podcaster on personal finance!

“I don’t really know where to go from here, our savings are not enough given our family cash flow requirements; the possibility of saving a significant amount over the next few years is completely unlikely as I find it hard to find work. I worry about not having enough to execute my goal, yet I feel there is little I can do to change the situation. Perhaps I am going through the typical pre-retirement phase.”

Rob’s Comment: All of my work in the investing area is rooted in what the historical data says. There are many who see the value in this. There are also a good number, however, who find it “depressing” to know what the numbers say. I need to persuade this group that understanding the numbers empowers an investor, that it can never be a negative to learn what the numbers say. Patricia’s words do a great job of illustrating the empowerment that comes from knowing what the numbers say.

Getting Out of a Rut

My thought is that Patricia’s next step should be to employ the power of quantitative research that she discovered exploring the investing realities to learn about places where she can painlessly reduce spending. Some of us work the spending side hard and fail to do all that we can on the investing side. Some of us work the investing side hard and fail to do all that we can on the spending side. There is a law of diminishing returns that applies to both sorts of endeavors. When you find work in one area not bearing as much fruit as you would like, it’s time to turn your attention to the other. When you are doing this right, your saving efforts spur you on to learn more about investing and your investing efforts spur you on to learn more about saving.

I also suggest that Patricia spend some time with The Stock-Return Predictor and the Investor’s Scenario Surfer. Many take the news reported in the Retirement Risk Evaluator — that there’s a good chance that a 4 percent withdrawal won’t cut it for those retiring with a high stock allocation at today’s prices — as depressing. Use the other calculators to explore the other side of the story. Take some money out of stocks until prices return to reasonable levels and you become able to take advantage of the truly juicy long-term returns available to us once we see a big price drop. At a P/E10 level of 10, the most likely annualized 10-year return is 10.7 percent real. Earning a return in that neighborhood for a decade will bring dreams of early retirement to reality many years sooner for a good number of us.

Shall we all begin saying prayers for a return to sanity in stock prices?

Elizabeth’s Story of Finding Life Purpose (E-Mails to Rob) — “I Have Much More Confidence in My Ability to Understand What Is Happening”

“I just want to say thank you.

“As a naive buy and hold forever person getting too old for that approach, I woke up around DJI 13200, realized I had a lot to learn and had better learn it fast, and found this site. I now have cash sitting in MMFs that has not disappeared out of my retirement funds.

“I also have much more confidence in my ability to understand what is happening, and to respond appropriately as the situation evolves–although I think this will be a long painful drop.

“I think that the din of public and especially commercial information based on: (a) an unstated infinite time horizon; and (b) a lack of intersection with the valuation process has done a great disservice to many people who might actually like to retire someday.

“Only when the market dropped significantly last summer did this all become “discussable” in polite company — and even then, it was difficult in many settings. I found that none of my friends (who are not in financial services) had any idea how to sort out useful information from sales pitches–and I was paddling along knowing I’d better do so quickly.

“You were putting all this information out a long time before the inevitable began to show itself in real time. I was not watching then, but obviously it got somewhat ugly in the discussions you described on the site. Again, I thank you for your public service and, in another dimension, for the personal courage it took to make it happen.

“I can hardly say how much I appreciate what you have done here! It’s a site to live by!”

Rob’s Comment: Elizabeth hits on something important when she says “I also have much more confidence in my ability to understand what is happening.” This is critical for the long-term stock investor, in my assessment.

I do not claim that we now know all there is to know about stock investing. I believe that we are in the middle innings of an amazing learning experience. We don’t know it all. But I think it is fair to say that our community now knows a good bit more than John Bogle or Bill Bernstein or Scott Burns or Jonathan Clements. And these are four of the most respected names in the investing advice business! If we know more than them, we know more than a whole big bunch of others too. I am highly confident that we are on the right track.

Achieving Life Goals

One of the things that makes me confident is that Rational Investing just hangs together in a way that Passive Investing does not. I believe that the primary reason why we see such hostility on the part of the Passive Investing enthusiasts when their ideas are questioned is that deep in their hearts they do not really believe in their ideas themselves. In fact, I question whether it is even right to call the principles of Passive Investing “ideas.” They are not the product of rational thought. They are the product of emotion supplemented by intense rationalizing (something very, very different from reasoning). There has never been a time when valuations did not affect long-term returns. It is impossible for the rational human mind to imagine a scenario in which valuations would not affect long-term returns.

Buy into the Passive Investing approach, and you ground your investing strategies in irrationality. This of course may work for so long as the market remains irrational (today’s prices are obviously irrational). But rationality must always enter the picture again or else the market and even the economy that supports it would have to collapse. When that happens, the nice-sounding slogans of the Passive Investing enthusiasts disappear into the mist. They are so much nothingness.

Buy-and-hold cannot be rooted in nothingness. To succeed, it must be rooted in something solid. I like the Rational Investing approach because when exploring new ideas I feel sure of the ground underneath my feet. I think that one of the reasons why Passive Investing enthusiasts are so dogmatic is that they are so unsure of themselves. In contrast, Rational Investors can admit mistakes because we don’t see it as a life-threatening event to acknowledge having gotten something wrong; we admit the mistake, take note of what we can learn from it, and get on with our lives. Making mistakes and fixing them is just part of a natural learning process to those who don’t feel a need to defend indefensible “ideas.”

Successful investing is buy-and-hold investing. Buy-and-hold requires confidence. Confidence comes from building on a solid foundation. Accepting that stocks may perform in the future at least somewhat as they always have in the past provides a solid foundation to all our explorations. Rational Investing works.

And for a highly encouraging reason. Rational Investing works because humans are not inherently irrational creatures. We are all guilty of irrationality at times. But we all crave rationality too. When we find it, it gives us the confident feeling that we need to invest successfully not only in bull markets but in whatever conditions we happen to be required to live through during our investing lifetimes.

I am persuaded by the many kind and intelligent and supportive comments that I have received in recent years from my fellow community members that most middle-class investors are genuinely interested in learning how to invest successfully. We are not dumb. We are not greedy. We are genuinely confused. People want to do what’s right and have a hard time believing that so many big-name “experts” could get it all so terribly, terribly wrong.

Sam’s Story of Finding Life Purpose (E-Mail to Rob) — ”It Jolted Me From My Preconceived Notions.”

I just started going through your website — it jolted me from my preconceived notions.

The Pursuit of Happiness

The more I read your articles (most of them posted around 2007) I wonder how right you have been about the excessive valuations. But then again if I had read them in 2007 when posted, I would have just dismissed them as my financial advisor would have wanted me to.

Rob’s Comment: Sam shows by these words that he “knows” some things about investing that most of the “smartest” investing experts in the world today do not know. The line that jumps out at me is the line in which San says that if he had read about the effect of valuations in 2007, he would have ignored what he read. He didn’t want to hear that message in 2007. So he would have just tuned it out.

This is the side of the stock investing story that is rarely discussed. Investing is not an intellectual game. It is an emotional game. It’s not the investors with the highest IQs who are most successful. It’s the ones who have developed the greatest amount of emotional balance.

There is nothing tricky about Rational Investing. The idea that the price you pay for stocks affects the return you obtain from them is the most obvious observation imaginable. It is controversial because it is obvious. It makes those who think of investing as an intellectual game feel bad to see that they have been barking up the wrong tree for a long time.

The bad news is that we cannot today rely on most big-name investing experts to steer us straight. The good news is that we are far more capable of figuring things out for ourselves than most of us today realize.

I hope that Sam will continue his journey to a richer and fuller and deeper understanding of the stock investing realities.

Middle-Class Millionaires — Page One

Middle-Class Millionaires — Page Two