Financial folks tend to overcomplicate things. Their jargon is an impenetrable wall of confusion to new investors.
Let me uncomplicate things for you. For most people, all you need is a bank account.
Let’s unpack this a bit. You are reading this note because you are a professional or semi-professional or serious investor. Most people do not fall into that category.
We should not be pushing stocks on people who can’t intellectually and emotionally handle them. Stocks are unsuitable for many investors. They are too volatile.
And most people have terrible instincts. They will pile in at the top of the market and barf on the lows, no matter what “the experts” tell them about “stocks for the long run” and dollar cost averaging.
People are human beings, and they screw up all the time. But it is really, really, hard to screw up cash in a bank account.
So the first step in investing for your retirement is to go to a bank, open a savings account, and put as much money as you can in it.
You can’t lose cash in the bank if you have less than $250,000 in it. Even if the bank goes tango uniform, you will be made whole.
There is an incredible amount of value in not losing money. A professional would say that you have a max drawdown of zero.
But but but… how will you save for retirement if you’re not compounding at 8/10/12%?
You will just have to save more.
Isn’t that criminal, telling people to keep their money in a bank where it earns virtually zero, instead of putting money in the stock market that earns 15% a year?
That’s going to be my recurring theme, taking less risk and compensating for it by saving more.
Let’s talk about saving.
Until It Hurts
When I was 22, my fiancée and I moved out to Washington State for my first job. I drove a Toyota Tercel. We got a s—box apartment for $350/month. Our weekly grocery bill was about $45. We basically never went out to eat.
I was getting paid about $860 every two weeks, after tax. My fiancée was making about the same.
We saved, and saved, and saved.
Most of it ended up in the bank. Every two weeks, I was jamming as much money as humanly possible in that savings account, which by the way, was yielding about 5%.
A couple of years later, we had about $40,000 saved up, which is pretty powerful. Two 24-year-olds rolling around with about $40,000 in cash and very little debt (my fiancée—now wife—had about $10,000 in student loans. I had none).
You don’t hear stories like that these days because young people (regrettably) have more student loan debt.
Also, saving just isn’t as fashionable as it used to be. Thirty or forty years ago, that is what people did. My mom had a passbook savings account. I had one, too. We used to go to the bank and deposit money in the bank.
The stock market was some great mystery beyond the realm of human understanding that used to crash now and then. We had no knowledge of it.
The contempt with which people hold savings in a bank today is incredible. You’re a chump for earning zero and not buying Amazon.
Saving is about delaying gratification. In some respects, it is an act of faith. You put off buying something today to buy something else tomorrow. You don’t know what that is, but it might be something good. So you wait.
That involves making sacrifices. If you know you’re going to drop $100 on a bar tab when you go out, maybe stay home and watch the tube. Maybe spend a year staying home and watching the tube.
Here is one very important thing I have learned over the years: Wealth is typically the product of one or two large decisions, not a million small decisions.
Stiffing ten thousand servers on their tips is not going to get you to a million dollars.
But buying a house at the right (or wrong) time, or getting a job with a growing company that gives you stock options—that is how people become wealthy.
So to the people who think they are going to cheapskate their way to being millionaires, well, yes, you might get there. But you cannot do much more reputational harm to yourself than by being cheap.
People who are tight with a buck are not popular: lousy tippers, people who never pick up the tab, people who never give to charity. It can be tough to balance these social concerns with your overriding goal of saving money.
Moderation is important. I think a reasonableness test should be passed. I was bringing 99 cent cans of beefy mac to the trading floor for lunch at Lehman Brothers. That probably wasn’t necessary.
The Big Decision
Anyway, my wife and I took our $40,000 and moved to California in 1998.
We wanted to buy a condo—I’m not really sure why. I didn’t know anything about owning property. I certainly didn’t know how a mortgage worked. I knew absolutely nothing. I had no idea what a huge risk I was getting myself into.
But there we were with a real estate agent, looking at condos. We finally found one that we fell in love with. It cost about $176,000.
We took most of that $40,000 and used it as the down payment—a staggering amount of risk. Of course, California in 1998 was a good time to be buying a condo, so when we went to sell it a little over two years later, we sold it for…
$297,000. My investment had nearly doubled in two years.
Total luck, for sure. But let’s back up and look at how this happened:
- We had no debt
- Which allowed us to save
- And take a calculated, but concentrated risk
- Which paid off huge
The million small decisions made the one large decision possible.
Talk about financial freedom! When I started working at Lehman, most of my colleagues had no savings and were struggling to pay off student loans. My wife and I had multiple six figures in the bank, despite having incomes that would have otherwise given us a lower-middle class existence.
All of it was possible because we had cash. By the way, cash is not stocks or bonds or mutual funds. Those are assets.
People like to say they have money in “the bank,” when in fact they own assets who fluctuate in value. The stock market is not “the bank.” It is the opposite of a bank.