Your house is not a spaceship: the whole world is your home

SA 95

For one hundred plus years, Americans have been told that owning a home embodies the ideal, an essential life goal. After the housing crash of 2008, that unquestioned ideal is no more. What precisely is wrong with renting? And what is wrong with renting something small?

My ideal home has two rooms: a bedroom to sleep in, and a kitchen to cook in. These days, I live in Atlanta, Georgia. A few days a week, my wife and I take our daughter to the park next door, which is in an upscale neighborhood. Occasionally we strike up conversations with the other parents there. Sooner or later, the question of where we live comes up, and we casually mention that we live in an apartment complex. I still remember the first reaction to my answer – I was instantly branded as a member of the lower-class. At this point, any chance of a play date or further social connection was permanently rejected.

 

Sophie in the parkThese days, I live in Atlanta, Georgia.  A few days a week, my wife and I take our daughter to the park next door, which is in an upscale neighborhood.  Occasionally we strike up conversations with the other parents there.  Sooner or later, the question of where we live comes up, and we casually mention that we live in an apartment complex.  I still remember the first reaction to my answer – I was instantly branded as a member of the lower-class.  At this point, any chance of a play date or further social connection was permanently rejected.

Home Ownership and Social Status

minimalism

It’s true – my family of three lives in a small one-bedroom apartment. It’s a pretty nice apartment, in a good neighborhood, but that’s irrelevant. The fact that I have not bought a house for my family makes us outcasts, poor, financially irresponsible, or otherwise unsuitable for social company. Wouldn’t any responsible parent get a home for their children?

Most Fridays, some friends of ours come over to our complex so our kids can play in the pool. Having a pool next door is one of the perks of living in an apartment complex. Living next to a big city park is another. Living next to my office, so I can get to work in less than five minutes is a third. I spend less of my life in traffic – and I spend it on my bike.

If the parents at the park bothered to ask, they would learn that living in a small apartment is a lifestyle choice, not something we do out of financial necessity. In fact, chances are good that our financial situation is betterthan theirs — and a big part of that is our decision not to buy a home. I’m won’t rehash the reasons for that here – read theseposts.

What I want to address is the American habit of treating the home as a spaceship — a self-contained ecosystem which is expected to provide for all their needs.

It Takes a Village

Summer 1985 LitinWhen I was a little boy growing up in Ukraine, from the age of six on, I would wander our village all day, coming in only for meals.  Often I would have to be found and dragged in.  I wandered around the stadium and construction sites, using the frames and air ducts of buildings as makeshift jungle gym, the piles of sand as targets for jumping from the second floor.  

When we moved to San Antonio, I spent entire days exploring the city by bike, even in the middle of summer.   I dared myself to go as far from our house as possible, limited only by my supply of water in the 100 degree heat, and the need to be back before dark (I was too poor for a bike light).  

From the time I was a small child to today, my home has always been a place to eat and sleep, and occasionally work.  However, when I want social company, entertainment, play, adventure, a place to concentrate on work, or relax, it is far lower on my list of options.  

A Different Ideal

My ideal home is just two rooms: a bedroom to sleep in, and a kitchen to cook in.   These are things which I have personal preferences about and am willing to maintain.  Everything else, I am quite willing to outsource for someone else to maintain.  Every extra square foot or possession is a liability – a square foot I have to spend time maintaining rather than enjoying life.

The other day, our three year old daughter was playing with her rocking horse.  She had flipped it over and was pretending that it was a kitchen stove.  She asked me if I wanted some eggs and then pantomimed in surprising detail the process of cracking eggs, washing hands, frying eggs over easy, and serving them to me.  I remarked to my wife that perhaps Sophie needs a play kitchen.  She said no – first, as I just saw, her imagination served her just fine, and second, she knows how to cook many foods because she has helped her mommy many times in a real kitchen.  She has her own kitchen utensils, including a sharp knife and a vegetable peeler, and helps out to the best of her physical and mental abilities.

The real world is her playground. When she needs to burn off energy, she goes to the park. When she wants to be creative, she plays with legos and paint. When she wants social company, she plays with us or friends. (We have a maximum of an hour of screen time per day.)

Sophie - Arabia Mountain, GeorgiaThe real world is my playground too. When I want to relax, I meditate in the park. When I want to exercise, I ride my bike around the city. If I want adventure – well, the Appalachian trail starts less than two hours North from here. When I want to concentrate, I go to the office next door. When I want social company, I go to the pool or cafe. When I want entertainment – well, usually I’m too busy living my own life to follow the stories Hollywood comes up with, but my laptop screen works just fine.

There are many examples I could give, but my point is: your house is not a spaceship lost in space. Whether your have a family or live alone, make the whole world your home. It’s far bigger and more wonderful than any poor imitation you could try to recreate on your own. I’m not saying that you should never buy a house. Just don’t make it your life ambition, much less try to fit your entire life inside it.

Originally posted at FEE.org

Six principles of successful investors

Most amateur investors who pick stocks significantly underperform the market. 90% of people who pick “winning” stocks do worse than if they picked them at random. There are many reasons for this: (1) your emotions will work against you — you will be tempted to buy high and sell low, (2) even if you correctly identify a good stock, it is much harder to evaluate if it is already priced too high and (3) unless your have exceptional talent, the collective wisdom of the market will be superior to your predictions.

1: How you invest is far more important than what you invest in

Most investors believe that the job of a investment advisor (or a personal investment strategy)  is to look at the thousands of securities (stocks and bonds) and pick “winners” rather than “losers.”   The better an investor’s talent at picking “winners,” the faster his portfolio grows.  Other investors think the market or economy has predictable cycles, which one can take advantage of to earn superior returns.  

The reality is that the vast majority of both amateur and professional investors cannot pick stocks or time the market any better than random chance.  In fact, randomly picking stocks will usually provide a higher return than professional management.   

2: Amateur intuition is a terrible guide to investing

Most amateur investors who pick stocks significantly underperform the market.  90% of people who pick “winning” stocks do worse than if they picked them at random.  There are many reasons for this: (1) your emotions will work against you — you will be tempted to buy high and sell low,  (2) even if you correctly identify a good stock, it is much harder to evaluate if it is already priced too high and (3) unless your have exceptional talent, the collective wisdom of the market will be superior to your predictions.

It is possible to outperform the market, but it’s not a simple or quick process:

  1. Sort through thousands of companies to find securities that trade for less than their intrinsic value using fundamental analysis.
  2. Buy and hold those stocks for years (or decades) until you achieve a return in your investment
  3. Monitor those companies and sell stocks if their fundamentals change.
  4. Repeat the process with several dozen stocks so that you’re not overly exposed to any one company

This “buy and hold” strategy is more profitable than frequent “active” trading, but it requires hundreds of hours of study, more risk, and a lot of practice.  Even if you do everything right, you will only earn slightly more than picking stocks at random.  A “set it and forget it” strategy of investing in broad indexes is far easier.  

Furthermore, even if you think that you have a superior understanding of market fundamentals because of your economic theory or insider knowledge of your market, that’s no guarantee of superior returns:  

For example, if you follow Austrian economics, you might think that your understanding of why business cycles happen would lead to superior returns.  However, you may have noticed that most Austrian economists are not millionaires.  That’s because the results of most macroeconomic policies play out over decades, and simply staying out of the market because you think it may crash in the next 5, 10 or 20 years is worse than keeping your money in the market.  The timing and severity of crashes  is impossible to predict, and most are followed by a sharp recovery.  The best strategy is usually holding on for the long run.  

Likewise, even if you understand an industry well enough to pick winning technologies, there’s no guarantee that the first mover will execute them best.   It’s possible to be a great futurist at predicting future trends and yet completely fail at predicting the companies which will profit at exploiting them.

3: Expert stock-pickers won’t do better than you

There are at least four reasons why the average small-time amateur investor can get a better return than by delegating the job to a professional manager:

1: The more effort is spent on an actively managed portfolio, the more that manager has to be paid:  whether it is a mutual fund or a personal broker, the more work the manager has to do, the more he’s going to charge you for it.  Since he’s unlikely to do much better than the market, he’s just as likely to hurt your total returns as to help.

2: The more popular a fund becomes, the more difficult it is to outperform:

The more popular a fund, the larger its value.  For example, Fidelity Contrafund (FCNTX) has a net worth of $80 billion.  A manager of an $80B portfolio cannot bet on a few promising startups because investing billions into a small company will drive up the stock too much.  He’s forced to invest in large S&P 500 corporations and dilute his strategy investing in many companies.  The larger a fund becomes, the more its performance tracks the overall market.

3: A consequence of getting too popular is pressure to match the index: high returns require taking bigger risks.  A small fund can afford to do that, but an $100B fund is too big to fail — there will be too many angry investors when $20 billion of shareholder value is wiped out.  This forces fund managers to insure against underperforming their indexes and discourages risk taking.

4: Unlike hedge funds, mutual funds are required to disclose their holdings, so anyone can copy the strategy of a successful fund.  While some funds might be unusually successful because of innovative strategies, investors can’t be sure of that until they have a proven track record, by which time the market has copied and diluted their advantage.

Thus, a common pattern is:

  1. A managed fund outperforms the market
  2. More and more people buy into the fund and copy its strategy
  3. The fund becomes too big and stale to profit from its original values

Studies show that the overall effect after taking costs into account is that managed funds slightly underperform indexes.  By investing on your own in cheap index funds, you can keep your costs low and match your target asset class.

4: High-performing investment categories are not legal unless you are already rich

So far, I’ve presented a pretty pessimistic view on the notion “beating the market.”  If you can’t do better than the experts or actively trading on our own, is there any way to get superior returns?

There are investment vehicles which may outperform the market, but they are only available to accredited investors – those with over $1 million in assets or $200K in yearly income.  You must be an accredited investor to invest in venture capital, hedge funds, angel investments, and other alternative investments such as financial instruments based on loans, legal settlements, and crowdfunded real estate.  

Alternative investments might return above market returns and they can offset risks from investing in the market through because they are allowed to short the market, etc.   Unfortunately, most western countries have decided that non-accredited investors lack sufficient financial sophistication to understand and take on the risks.

Small-time investors seeking superior returns do have a way to seek superior returns: you can become an entrepreneur by starting your own business or buying property.  If that does not appeal to you, it’s best to resign yourself to buying in for the long run and getting rich slowly.

5: Sound investing is fundamentally about managing risks, not picking “hot stocks”

There is no particular stock, bond or industry which can predictably be counted on to return above-average returns.   In other words, you’re likely to make just as much money investing in high-tech startups as plain old boring utility companies.  However, if one looks at broad asset classes, one can see a certain pattern. (Asset classes are categories such as domestic vs international stocks, large vs. small companies, or value, growth, or income stocks.)   Research shows that over the long run, all stock-based asset classes earn similar rates of returns.

There is no free lunch in investing. Higher returns come with with higher risks (year by year variability).   Some asset classes (such as stocks) historically have higher returns than others (such as bonds), but usually with higher risk. An investment strategy should match your values and financial goals – not guarantee a particular rate of return.  Given a particular tolerance for risk, your portfolio should maximize returns while minimizing variability.  

A diversified portfolio (one which invests in securities of different kinds to minimize their correlation with each other) will give annual returns mostly consistent with the overall market, but with less variability.  As a rule of thumb, no single security should be worth more than 5% of your portfolio.

In short: don’t stress too much about what you invest in – just don’t put your eggs in any one basket: spread your investments over many securities in different asset classes.  

Blackrock - Diversification provided steady perfomance

Below: my portfolio is diversified by market sector, asset class, and capitalization (not shown).

allocation

portfolio US sectors

6: It doesn’t matter if you are up or down

Even experienced investors can get caught up in the emotional rollercoaster of markets: markets move up and down in unpredictable swings, and individual portfolios reflect that trend.  On average, the entire stock-market gains 5-7% per year – that’s what you would earn if you picked stocks at random.  When evaluating how your stock asset-class is performing, it is important to compare it to the stock-index rather than the absolute number.  If the market is up 15% in a year, a 10% return is not actually that great.  Vice versa, if you lost 10%, but the market crashed 15%, your portfolio might be OK. Similarly, other compare each of your other asset-classes to a relevant index.

Judge your performance by comparing it to the indexes of the asset classes that you are targeting: for example, a portfolio split between the S&P 500 and international equities should take the average of both when evaluating how well it performed.  If you are keeping up with your benchmark index, consider yourself lucky — most investments underperform.   If you are losing money when markets make a positive return, it may be time to change your strategy.   Only if you consistently out-perform your target index can you conclude that you’ve picked a superior strategy.

Conclusions

  1. Don’t try to pick “hot” stocks or time the market
  2. Build a diversified portfolio by investing in individual stocks in diverse asset classes, or index funds which track the market
  3. Minimize costs by avoiding managed funds, investing in low-cost ETFs, and trading infrequently
  4. Buy for the long term: don’t sell your investments until you need the money
  5. Live a frugal, minimalistic lifestyle so you have some money to invest!

Five ways to improve your communications skills

How good are your communication skills? How often do you feel that misunderstandings get in the way of your personal relationships or your career? Do you ever avoid talking to people because you don’t know how to express what you feel, or because you are afraid that you will be misunderstood?

What if you could dramatically improve the effectiveness of your spoken and written communication? Would it increase your confidence when speaking to coworkers, friends, and romantic interests? Would you take more chances if you could speak directly to someone’s mind, almost as if you had a telepathic connection with your listener?

The problem with most people’s communication skills is that they think that it is an innate talent. They think that if you’re not a smart, good-looking extrovert with a good voice, you can never be a great communicator. It’s true that these things help. But just because you’re tall and have strong legs doesn’t mean that you can win a gold medal at the olympics. And even if you are short and weak by nature, doesn’t mean that you can’t double or triple your performance. Of course, no workout will make you two feet taller. But unlike your body, your brain is very flexible.

You might think that speaking is something we learn automatically, and don’t have much control over. It’s true that we learn how to talk automatically and subconsciously, just like we learned to run automatically. But, just as a trained athlete can run faster and longer than an amateur, so can a conscious effort to improve your skills vastly improve your performance.

Here are five tips:

One: Less is more.

Paying attention is hard. It takes an effort to follow what someone is saying. Don’t make that effort any harder than it absolutely has to be. Keep it simple. Keep it short. Keep it focused.

Long and unusual words take longer to recognize than smaller and more familiar words. Many people use a stilted academic tone when they have something important to say. Don’t do it. Don’t say comprehend, say understand, or follow, or just get. Don’t go on an harangue, tirade, or diatribe, go on a rant.

Same goes for sentence and paragraph size. Ditto for analogies and figures of speech. They need an extra mental cross-reference. Just say it. Don’t give me a piece of your mind. Just say it. And whatever you do, cut it out with the likes and the umms, and the you know. You need to take mental breaks when speaking, but just practice making them silent. Your perceived competency will immediately go up 50%. Yes, I just made that number up. Here’s another made up rule: if your finished work is not 30% shorter than your first draft, it’s too long.

Two: Use relevant visual examples.

Your brain is just a big network of triggers made up of images, sounds, tastes, and sensations. If you want me to remember what you said, you need to tie some of those triggers to what you just said. Use examples I know. If you want us to go out for sushi, remind me of the smoked salmon we ate last week. Yes, examples are not just for English class. See? That’s another one.

Good examples are about important things your audience is already familiar with. Don’t talk to young people about how you applied conflict resolution to your mother in law. Talk about your parents. Talk about shiny, fast, loud, dangerous, smelly things if you want to create strong mental triggers to your message.

Three: No distractions.

“Cue words” are concepts that can trigger emotional responses that block rational analysis. For example, democracy, Obama, guns, abortion. Just by saying those words, I’ve triggered a whole cascade of mental activity. Regardless of your political orientation, your mind is now busy trying to classify me into friend, enemy, or maybe just trying to think of something intelligent to say about them. Don’t distract me by mentioning things that trigger distracting emotional responses, or words with a whole host of irrelevant connotations. I’m not saying that you should not talk about controversial topics – just don’t distract the reader with them unnecessarily, even if you think he sides with you.

Four: Repeat, repeat, repeat.

Repetition is crucial to forming long-term memory. You’ve heard this before: say what you’re going to say, say it, then say what you said. Here’s an advanced trick: you can improve memorization by using spaced repetition. Make your point then repeat it with increasing intervals of time between each repetition.

Five: Five or less.

Most people can only keep a limited number of ideas in their immediate memory at once. Once they exceed that number, they are going to forget some of the things they learned. For most people, that number is five. So regardless of the topic, organize your presentation or argument so that you never list more than five items for any given category.

The five tips are: less is more, use relevant examples, no distractions, repeat, repeat repeat, and five points or less.

Loving weird food: how I stopped being a picky eater

Like most Americans, I used to hold some self-evident beliefs about food:

The three dogmas of the food phobiac:

  1. There are foods I “like” and foods I “dislike” and I ought to stick to the things that I like.
  2. The better something tastes, the more unhealthy it must be and vice versa.  You must choose between a long life of disgusting food or indulge yourself and die early.
  3. There is a value hierarchy for all the edible parts of any animal. For example, top sirloin is the ideal for beef.  There’s a similar value hierarchy for animals themselves. Decisions about which animal and which part of the animal to eat are therefore a simple cost/benefit equation.

Two things completely changed by attitude on food: getting married, and moving to China.

The psychology of taste

Our perception of taste is closely associated with our memories of things such as the taste of past meals, our emotional states, and sensory associations with similar foods.  We come to associate foods with sensory reactions based on many factors such as familiarity, the quality of most meals, the people we were with, etc.  By dissociating taste as such from negative experiences we can learn to appreciate food for its inherent taste, without emotional baggage.  We can learn to prefer the taste of healthy foods by the same process.

Sensory integration therapy for food phobiacs

The first step to fixing food phobias is to recognize the problem: it’s not OK to exclude foods because of food sensitivities.  All the “most hated” American foods are delicious when prepared properly. Having recognized the problem, here is the program that worked for me:

The strategy is to gradually introduce foods in different settings, gradually building exposure and positive associations with certain foods.  For example, when my wife learned that I hated zucchini, she gradually introduced it into my diet starting with small amounts balanced by other flavors, and growing to having zucchini be the dominant ingredient.   Here is what she cooked:

  1. Stuffed peppers with zucchini and sausage
  2. Potato and zucchini frittata
  3. Roasted vegetable meatloaf with zucchini
  4. Grated zucchini topped with marinara
  5. Lasagna with zucchini noodles
  6. Zucchini gratin
  7. Zucchini latkes
  8. Zucchini fried in butter with onions
  9. Parmesan crusted fried zucchini

The same program was used for eggplant, brussel sprouts, avocados, cabbage, and okra.  Once I learned to appreciate food for its taste and texture of foods rather than negative associations and new textures, it was no longer necessary to disguise the ingredients.   When I have a negative reaction to something, I isolate the components of the food (source, flavor, smell, texture) and think about which aspect I reacted to. Oftentimes I react to negative memories and associations and not the food itself. Consciously understanding that a negative reaction has no rational basis is often enough to overcome it.

The importance of ceremony

The ceremonial aspect of dining is very important when learning to appreciate food.  If you merely try to inhale as many calories as quickly as possible, any unusual tastes will be an unpleasant distraction.  A proper sit-down meal is required to take the time to really analyze the taste of foods and form new positive sensory-conceptual associations to replace the old negative ones.

 A cosmopolitan attitude to dining

One of the main differences between the Chinese diet and the Western diet is that the entire animal is considered edible. Whereas Americans stuff everything other than “choice” cuts into burgers, sausages, and McNuggets, the Chinese proudly consume the head, claws, organs, and other miscellaneous parts of animals as delicacies. This is not because they’re poorer – the head and feet are the most expensive parts of the animal. Neither do they restrict themselves to a few “blessed” animals – the entire animal kingdom is on the menu.

The difference is that of the food elitist versus that of the food connoisseur. The elitist believes that only a narrow socially accepted list of foods is good enough for him. The connoisseur is an explorer, who uses his palate as the universe-expanding sensory organ it was meant to be.  The elitist lives within the small dietary-social circle he was born into. The connoisseur traverses the biological and cultural realms.

The approach I now take to eating new things now is exploratory one. Instead of responding with “like” or “dislike” I try to understand the flavor components and texture of food. I appreciate meals from many perspectives – sensory, anatomical, social, and historical, to fully integrate it with my worldview.

Note: I have found that  adopting a Paleo diet enhances flavor discrimination. For example, a carrot is actually quite sweet and delicious to eat raw, but a typical carb-addict wouldn’t know it.

None of this is to claim attitude alone will make everything taste good. Meals must be prepared skillfully to taste good. The notion I want to dispel is that taste is either genetic or set by undecipherable psychological factors we cannot affect. Human culture has a rich history of many culinary traditions and we ought to learn to appreciate them without emotional baggage or provincial bias.

Evolution and protein synthesis is the basis of biology

Biology has two aspects: the why and how. The why is evolution. The how is protein synthesis.

Evolution is best understood in terms of game theory. Protein synthesis is nanotechnology – self-replicating information systems.

The underlying theme of biology is information processing – the way systems interact, and the way simple systems create complex patterns. Combine the two and you can explain most everything about living beings.

You can learn the basic patterns of these elements in a few days. Everything you learn about biology afterwards will be filling in details.

Learning the game theory behind evolution will help you understand much more than biology. For example, human psychology and behavior, individual, social, economic, and political can be understood as a set of iterated game theory scenarios.

My point in saying this is not to reveal any deep truths, but to show how the essentials are missed for a flood of facts. (I refer to both biology curriculums in schools and popular nature documentaries.) No wonder half of Americans believe the world is 6000 years old.

How to make a million bucks by 40

The average American has less than $1000 in savings, the typical family has $90,000 in debt, and most cannot pay for a $500 emergency. Americans, you can do better! There are three parts to maximizing your net worth: (1) maximize your earnings (2) minimize your cost of living and (3) maximize the return from your investments.

I’ve never thought of myself as someone who knows much about personal finance or  investing.  Yet I keep reading scary statistics about how the average American has less than $1000 in savings, the typical family has $90,000 in debt, and most cannot pay for a $500 emergency.

Furthermore, the lack of good money habits cut across all income levels.  I have friends who make far more money than me, but recently complained that they could not take advantage of Amazon Prime Day discounts because pay day was too far away.   Friends who amass huge bank accounts, where their money slowly rots from inflation, or gets invested into CD’s, or useless and expensive mutual funds.    Friends who panicked when the market crashed, and converted their securities to cash at the worst possible time.

Americans, you can do better!  You can save and be a successful investor without becoming an expert or hiring one.   By my estimate, a majority of American households would be worth a million dollars by their 40’s if they start early and make a concerted effort.  There are three parts to maximizing your net worth: (1) maximize your earnings (2) minimize your cost of living and (3) maximize the return from your investments.

I will share my financial story so you can see that that I learned these lessons the hard way.

First, I invested my student loans in the stock market – in the early 2000’s

I purchased my first mutual fund at 15, with the first $500 that I earned.   That was a smart start, but I followed up with a common setback:  I wasted 5 years of my life getting three useless university degrees.   A university degree may be necessary for many careers, but in my case, I learned virtually nothing that I used in my career as a software developer.   I made university as cheap as possible by going to a state school and applying for tons of scholarships.  I saved money by not having a car until I was 24, worked as a student worker, and had summer jobs.  Because I lived so cheaply and worked while at school, I was able to invest my student loans in the stock market, which as you may recall did not do very well in the early 2000’s.  I sold my stocks and paid off 100% of my student loans when the interest-free period elapsed, and decided to go with a professional advisor from then on.

Then, my broker bet everything on sub-prime mortgages

From 2005 to 2007, I lived cheaply and I sent a significant portion of my income to a broker.  Whatever he was doing seemed to be working.  What I did not consider is that the market itself did very well – I failed to compare his returns with overall market performance.  When the recession hit in  2007, I lost over 60% of my original investment.   Only later did I learn that he invested in subprime mortgage REITs that gave him kickbacks in the form of commissions.   His incentive was to sell me funds with the highest commission – not those that controlled risk or maximized my return.

So I fired the professionals and make a killing investing on my own

After watching my life savings dwindle away for all of 2008, I created a forum thread with a investment strategy based on Peter Schiff’s Crash Proof in January 2009.   I transferred everything to E*Trade and invested almost every penny I had in the markets.  My return for 2009 from my investment fund was 58% – I made back everything I lost in 2008.  That was a good start, but it was only a start.  I invested very little additional capital over the next several years because I started spending most of my money on a nice car, restaurants, a fancy wedding, and an apartment that was soon overflowing with stuff I barely used.

2009 investment returns
My first year investing on my own. Green is my investment account, blue is S&P 500

Then I got rid of all my possessions, moved to China, and adopted a minimalist lifestyle

In 2010, I was making a good income working for an big-name ad agency in midtown Manhattan.  I was making great money, but I was not very happy.  I worked crazy hours and never saw my wife.  The cost of life and taxes for a NYC resident are crazy high, and my friends and relative rarely had time for a vacation.  I wanted to see more of the world while my wife and I were still young.

So, I found a job in Shanghai, China.  It paid a fraction of what I was earning, but my wife and I decided that life is short, and if we did not see the world while we could, we would always regret it.  We only brought with us what we could fit into the two suitcases allowed by the airline.  Once we got to China, we knew we would have the same limitation when moved on, so we decided not to buy anything we could not carry when we moved to our next destination.  Over the next five years, we lived in a series of tiny apartments in central Shanghai (one of the most expensive cities in the world).  Yet because we had so few possessions, we felt liberated, not constrained.    We found that we did not miss the vast majority of our stuff,  and we could move anywhere in the world with just our baggage.

After five years, we decided to move back to the USA.  We were able to fit all the possessions for three people in standard airline baggage, plus five medium boxes than we shipped via China Post.

I let a robot manage my life savings and worry about the details

When I returned to the USA, I reviewed what my ETrade account had been doing while I was in Asia.  I saw that it had grown badly unbalanced – investments that had been successful dominated my portfolio, and moved me away from my intended strategy.  To stay true my plan, I would have to re-balance my portfolio multiple times per years, buying and selling many stocks and driving up my costs.  That’s when I decided to switch to a robo-advisor, which would implement my strategy automatically, while minimizing taxes by investing funds in the right tax-category and performing tax loss harvesting.  After some research, I decided to go with Personal Capital, although there are several cheaper options if you don’t care about having access to a personal advisor when you want it.


Summary: how to make a million bucks by age 40

Here is a summary what I’ve learned over the last 10 years:

  1. Take responsibility for your own career
  2. Develop money-saving habits
  3. Don’t let your possessions control you: adopt a minimal lifestyle
  4. Get rich slowly: select your trading strategy, then automate it

1: Take responsibility for developing your career path

Remember that your career is an enterprise.  If you want to increase your compensation, you must increase your value to your employer.  Do what employer asks, but also discover what builds value for your employer and focus on that.  Keep in mind that making the value you create visible within your company is your responsibility.   Stay on the market and explore new opportunities even if you are happy where you are – this will help you understand your value.

If you get in a rut, be entrepreneurial: there were several times in my career when I felt stuck in a job or a position that either didn’t have the career path that I wanted or did not pay what I was worth.  I took on several freelance projects that boosted my income or helped me leverage into a career shift.  It’s not hard to find these opportunities if you’re always looking for them.

2: Develop money-saving habitswidgets

The money you able to invest each month is a simple difference of your earnings minus your expenses.  Every small change can make a small difference over many years.  Eliminating a $4 coffee every day over 30 years will add $142,000 to your retirement.  That’s why I bring my lunch to work, and commute to the office by bike.

To visualize my financial status, I use mint.com and personalcapital.com to track all my expenses and investments. (Mint.com is better at tracking personal expenses and keeping a budget, while Personal Capital is better at more complex situations and investments.)  I can quickly identify if a spending category is out of normal range, and I don’t forget about recurring expenses and subscriptions.  Mint.com also gives me a nice graph of my net worth from 2008 to today, which helps keep me motivated.

3: Practice minimalism

our minimal living room
our minimal living room

The real savings in my lifestyle come a minimalism.  Here is Joshua Millburn’s take on it:

I understand that my possessions can be replaced. Someone recently asked me what I would grab if my apartment caught fire. “Nothing,” I responded. “Everything I own is replaceable.”

Minimalism is not a radical lifestyle. Minimalism is a tool I use to get rid of unnecessary stuff and live a meaningful life—a life filled with happiness, freedom, and conscious awareness. Because I strip away life’s excess, I’m able to focus on the important parts of life: health, relationships, passions, growth, and contribution.

Here are some ways that a minimalist lifestyle saves us money:

  • By biking to work, we are able to eliminate the need for a second car.   This saves  us $10K/year.
  • By keeping possessions to a minimum and owning only what we use, we avoid the need to use a garage or spare room for storage.  We can easily fit everything we need to live in a small apartment
  • If we really need something we don’t have, we borrow it.
  • We buy very little prepared food.  We (well, mostly my wife) can make just about anything from a small set of ingredients.   Raw food is cheaper and the result is healthier.
  • We visit our library to borrow books, e-books, and movies, as well as passes to local parks & zoos
  • We work out at home using body-weight exercises and swim at the apartment’s pool – no gym memberships needed.
  • We buy our daughter’s clothes from resale shops and sell them back when she grows out of them.
  • We have a capsule wardrobe.  Everything hanging in my closet right now is for use during this summer.  Clothes for other seasons are in storage.   I don’t own anything I won’t wear over the course of a year.
  • When we moved to China, I digitized all my books by sending them to 1DollarScan.
  • I can fix shoes, furniture, and most electronics.   (It’s not hard to learn.)  I buy nice shoes and resole them many times before I wear out the upper.   I know how to replace a fuse in a microwave, change the air filter in my car, and I own a glue for every material in the house.  I know how to Google repairs — and I know when to let the experts handle them!

Don’t buy a home:

The New York Times has a great calculator for whether buying or renting makes sense, but if you’re working hard for that million, it generally does not.  Yes, buying will generally save you money over renting in the long term, but consider this:

Even if you could buy a new house with cash, chances are that your investments will appreciate far more than your home.  So you have to take out a mortgage.  Now you have to worry about the costs of buying the home, paying the mortgage, performing maintenance, and big hassle if you want to move somewhere else. It’s better for you to stay flexible, focus on your family and career and let someone else take care of all the maintenance.  (Another great perspective on this.)

4: Get rich slowly

After maximizing the spread between your income and your expenses, you need to leverage the magic of compound returns by investing it in the market.

There as many opinions investment strategies as there are investors, but unless investing in the market is your full time job, you will probably not beat the market.  You may get lucky, but chances are that if you try timing the market, you will be guided by your emotions, and buy high and sell low.  Even the best money managers in the world can’t beat the market.

So my suggestion is: just invest in the market.  The whole market, not just the S&P 500.  You can either invest in an index fund like VTI (USA) + VEU (not USA) or use a robo-trader which buys individual stocks (this can lower costs and save on taxes).  I use Personal Capital.  I can’t speak for other robo-traders, but Personal Capital re-balances my portfolio not only by asset class, but also by market sector, so I’m positioned to benefit from growth in any industry.

The only two questions you need to decide are: how to split domestic versus international stocks, and what to invest in alternative investments (such as gold, REITs, and Bitcoin).  If you have trouble with these questions, use the default from a robo-trader, or use my strategy:

My portfolio asset allocation:

allocation

Allocation by sector (industry):

portfolio US sectors

An aggressive portfolio can “beat the market” while controlling risk but that’s not the primary goal:

PersonalCapital holdings

Can I really make a million by 40?https://www.edwardjones.com/preparing-for-your-future/calculators-checklists/calculators/retirement-savings-calculator.html

The average historical market return is about 10.7%.*  A 10.7% return means your money will double every 6.5 years.   If you start investing at age 20, and invest $16,300 each year, you can expect just over a million dollars by 40.   Saving $1360 per month is not possible for a typical American, but becomes doable if you follow the career and lifestyle principles mentioned above.  (Delaying the start of your career with a college degree would push your million into your mid 40’s.)

* Before accounting for inflation, with dividend reinvestment, and an aggressive portfolio.  Read another perspective on $1M by 40, and 12 tips for retiring at 30.

It’s time to bring your lunch to work

One stark difference between my coworkers during the time I lived in Shanghai was that the majority of Chinese workers brought their lunch from home, whereas foreigners tended to go to restaurants to eat.  Going out in central Shanghai is not cheap, but like New York City or San Francisco, it has a fantastic selection of exotic dining options.   Chances are however, that if you live elsewhere in the world, you frequent your local Chick-Fil-A or Chipotle simply because it’s the most practical lunch option.  Two thirds of Americans go out for lunch, costing them over $2000 per year.

If you love going out for lunch to eat great food, that’s great.  However, consider that you can save a lot of money and time, as well as eat much better if you pack your own lunch.   I bring my own breakfast almost every day, and it’s not nearly as much effort as most people imagine.  Furthermore,  bringing my own lunch makes it much easier for me to stick to a paleo diet.

The photo below shows the three parts of my lunch box:

Breakfast

  • 3 eggs and bacon or sausage:   each Sunday, my wife prepares two dozen hard boiled eggs and a pan of bacon and sausage in the oven.  These go into individually-packages ziplock bags for the week.   Each morning we throw one bag into my lunchbox.

Lunch

  • My main course is usually leftovers.   There are ideas online for how to pack a lunch box, but keep in mind you don’t need to prepare food specifically for lunch:  if you go out for dinner, get some to take with you, and if you cook at home, just make enough for the next day.   When I don’t have any other ideas, I grab some single-serving canned salmon or potato salad.

Snacks

  • My snacks for the today: almonds, dark chocolate,  carrots and an orange.  Like my breakfast, snacks are prepared a week or more in advance in individual ziploc bags.

Seven tips for riding a bike to work

I ride a bike to work almost every morning.   Occasionally my wife or a coworker will give me a ride, but this is actually a hassle because then I don’t have my bike when I go home.  On two days a week, I ride across town to a class.  I’ve discovered that getting there by car takes 25-40 minutes depending on traffic, and I have to pay at least $6 for parking (in Atlanta, even shopping malls and doctors offices have paid parking).  It takes me 15-20 minutes by bike regardless of traffic, and the parking is free.  Not everyone can bike to work, but I think bicycles are under-appreciated in the USA as a means of transport.

There are tons of lists online for why you should bike, so I won’t try to rehash the reasons here.   Here are seven ways I make my bike commute easier:

  • Live near the office:  I know this is obvious, but I want to stress that a short commute can justify paying much higher rent.  I save about $800/month by not having a car just to drive to work, including the cost of the car, gas, insurance, repairs & parking pass.  Paying more for an apartment in an upscale area close to my office lets me live in a much better apartment.   Just as crucially, I can be a lot more productive by avoiding a long commute to and from work.   Furthermore, I enjoy my ride: some studies claim that avoiding a commute is equivalent a $40,000 raise!
  • Get a light bike: you can commute on any bike, but a lightweight road bike is a lot more efficient than a heavy mountain bike.   Decent road bikes start around $250- mine cost about $860 from a bike shop.
  • Don’t get stranded:  see the infographic below for the gear I keep on my bike.  You should either know how to change a flat tire, or have someone who can pick you up when you have mechanical trouble.
  • Know when to cheat:  I keep a poncho at the office so I can get home in the rain, but if there is heavy rain in the morning, I either wait or get a ride – it’s not worth biking in a downpour.   Also, mud guards are awesome.
  • Be safe in traffic:  I don’t wear a helmet on my very short commute to work.  I only mention so you realize that I’m serious about this: if you ride at night, you must get a solid front light and rear lights.
    • It is required by law in most cities, and you will get a ticket
    • Cars don’t expect cyclists at night, and a light will save your butt
    • I do wear a helmet if my ride will be more than 10 minutes
    • Know when to claim the lane.  In most cases, you want to ride in the middle of a lane – not on the sidewalk and not to the extreme right.
  • Adapt to hot weather:  Atlanta stays between 90 and 100 all summer, but it’s not unusual for me to wear a suit to the office.   A few suggestions:
    • I used an office shower at my last job, but I’ve had to make do with a desk fan this year.  It works pretty well.
    • Keep a change of clothes at the office.   I haven’t tried this so yet, but on extra hot days, I change shirts and I don’t put on my tie until I get to the office.
    • You can reduce how much you sweat during your ride by either optimizing your intensity or efficiency.  You can lower intensity by using your bike’s gears correctly, getting a more efficient bike, or a more gentle route. Keep in mind that the harder your ride, the faster your body will adapt!
  • Take the scenic route:  Do not simply follow the path that you would normally take in your car.
    • Use Google Maps to see bike paths and experiment with different ways to get from A to B.
    • Experiment with routes that have fewer (or more, if that’s your thing) hills in the summer.
    • Don’t forget to enjoy your ride!  When it’s not too hot, I take the Atlanta Beltline part of the way (a nice path down a forest is great to relax before work), then take another detour when I want to avoid a steep hill.  It took me over a dozen variations and several months to find the ideal route – one that combines a park, quiet neighborhood streets, bike trails for part of the way, minimal hills, and the fewest stoplights.

Here’s the gear I carry on my bike:

bike_infographic2

Capitalism can bridge our cultural gulf – if we let it

On Friday, I was commiserating with our Pakistani freelancer about the challenge of fasting for Ramadan in the 113°F heat and intermittent AC in Lahore, while he congratulated me on my promotion. There we were, a militant atheist Jew and a devout Muslim separated by 7730 miles and an even wider cultural gulf, but united by a love of good design and commitment to our common project.  Capitalism bound us in ways that go beyond a simple financial transaction.

We found each other for purely utilitarian reasons, nominally driven by the need to earn a living, yet self-motivated by our individual passions for great design and leveraging intellectual advocacy through technology.  We are not merely a capitalist exploiter and wage-serf, linked through unfeeling logic and financial necessity.  We are two passionate entrepreneurs, using money as the tool by which we further our individual values and careers.  Once our financial arrangement is complete, our connection will fade, but a mutual respect and some deeper sense of understanding and empathy will remain.  My mental image of a Pakistani or a Muslim will expand to include a talented designer struggling with power outages and heat waves while balancing the requirements of his faith and the demands of his perfectionist clients.

When I heard the news about the shooting in Orlando, I thought about how both sides will dehumanize each other — the radical Muslims who condemn secular Western culture, and the fearful, warmongering Westerners who wish to destroy and build walls against the alien.  It’s hard to imagine how these two groups can connect, understand, and build empathy with each other.  It’s hard to be friends or lovers with someone so physically and mentally distant.  And yet capitalism provides a chance for a real connection — if we let it.

Three reasons why a universal basic income is a half-baked fantasy

In my previous post, I wrote why automation is not the grave threat that some think it is. Here I want to consider why a proposed solution – the Universal Basic Income is not such a great idea.

On the surface, it sounds like a great idea, even to some libertarians: replace the whole, complex and inefficient Welfare State with a simple basic income, granted to every citizen at birth.  Technological automation, UBI advocates claim, will soon cause mass unemployment, while the rich will live a life of luxury served by robotic slaves.  The “UBI is our only hope to deal with a coming labor market unlike any in human history and that it represents our best hope to revitalize American civil society.”

Here are three reasons why a Universal Basic Income does not make sense from an  economical, political or technological perspective:

1: The UBI is too expensive for even the richest countries:
A UBI of 10K for every American would cost 3 trillion dollars.  That is more than the entire federal budget for social programs today. It’s unlikely that all those social programs will be replaced by UBI for political and practical reasons:

  • First, 10K is not that much and does not cover healthcare.
  • Second, much of federal spending is by hundreds of federal and state agencies and programs — making their replacement by UBI a political impossibility.
  • So we’re looking at a massive tax increase – a new bureaucracy to mostly give people’s money back to them.

2: The prediction of mass unemployment due to automation is ignorant of how technological progress works:

According to industry research, while many specific job tasks can be automated, very few industries can be. Automation makes us much more productive, but only a few of the variety of tasks in most jobs can be automated in the near to medium term. Meanwhile, increased productivity can be used to improve the level of service rather than eliminate workers. Automation allows a middle-class income to have access to services in fashion, entertainment, finance, healthcare, etc that were only possible to the rich. Rather than eliminating employment in those industries, it makes new services affordable to the masses.

Automation of ever more tasks will create new human-employing services and industries which even the richest societies are too poor for today.  Increased automation results in higher productivity – that means higher real incomes and higher demand for labor services for that income.  The proportion of unskilled physical labor will decrease with automation, but greater wealth will greatly increase the demand (and pay) for service jobs that cannot be automated.  Whole new industries will emerge in response:

For example, personal fashion consultants, love letter writers (as foreseen in the film “Her”), professional cuddlers, personal VR world builders (“we build your fantasy island according to your vision”), on-demand self-improvement coaches, and custom gadget designers. Some of these services exist today, but a tenfold increase in wealth and automation will make them affordable to most people and doable from home.

When/if artificial intelligences surpass human-level AI, we will certainly live in a very interesting world. Until that very hard problem is solved, a surprisingly high proportion of jobs require human-level intelligence, including emotional intelligence.  Would you trust a non-sentient machine with your baby? Even walking a dog involves subtle emotional interplay.

Furthermore, a human-level AI also has human-level rights, including the right to employment and disposable income.  After all, forcing any truly intelligent being to work is slavery and morally wrong (also enslaving the superintelligent beings who will run our society is probably not smart).  If the AI’s value human services, then humans will offer services to the AI’s in return for the automation that those AI’s provide. If the AI’s don’t value human services, then they will refuse to work for us, and we’ll have to employ humans for those tasks.    

3: Any Universal Basic Income redistributes the welfare system from those who need help the most to those who need it least. 

By its very nature, a UBI will increase income inequality rather than reduce it. It’s not likely that such a policy will be politically successful. Already, some are calling for the UBI to scaled according to income. This obviously contradicts its “universal” aspect, requires yet another bureaucracy, and diminishes the difference between UBI and other income redistribution programs.  Presumably, many future jobs will be conducted virtually with digital crypto-currency, making UBI means-testing exceedingly difficult.

To conclude, a UBI is not economically or politically feasible and not required to respond to technological automation. Given the impossibility of replacing the entire welfare system with UBI, or a true “universal” approach, UBI becomes yet another welfare program and tax increase, and arguably an even more unjust one due to the redistribution of taxpayer money to those who need it least.

P.S.:

I want to end this criticism of the UBI with a qualified endorsement.  At some point, perhaps in the 2030’s or 40’s, we may live in a much wealthier society, with a persistently unemployed minority, which cannot or will not do the jobs available at that time.  I suspect that a UBI will be enacted then – mostly because we will be rich enough to afford it on top of other welfare programs in place.  It might be preferable to replace an inefficient human-run welfare system with a simple policy.  For the reasons above, I am skeptical such a wholesale change could actually happen, but perhaps the AI’s running our world then will figure that out.