Why aren’t all economists rich?

Why aren’t all economists rich? Some are. Economics is the most common degree amongst the world’s top 100 billionaires. Some famous economists such as David Ricardo and John Maynard Keynes were very wealthy indeed. However, for the most part, economists will give you a list of excuses why understanding economics won’t make you rich.

They are wrong.

How do I know this? I used my understanding of economics to become wealthy.

I won’t go into the (lame) excuses economists give. Instead, I will tell you how I used my understanding of economics to build my fortune.

Some of these topics could fill a book, so I’ll just cover the basics. I’ve already written articles about most of these topics.

Compounding returns:

The returns from re-investing profits from an investment are the single most important principle of personal finance.

This taught me a few things: (1) maximize my savings rate (2) invest while I’m young (3) time in the market is more important than timing the market.

Efficient market hypothesis:

The efficient market hypothesis (introduced by F.A. Hayek in 1945) is the idea that prices incorporate all public information about markets. This means that “buy low, sell high” is impossible using only public information.

This taught me:

  • (1) Technical analysis/day trading is stupid
  • (2) Don’t pick stocks (unless you can dedicate your career to it). Invest in broad-based index funds
  • (3) Keep costs low. You can’t consistently generate superior returns, but you can maximize the return from the market by buying cheap ETF’s.
  • (4) Maximize time in the market because you can’t time the market.
  • (5) Consistent alpha generation requires non-public information
  • (6) Don’t trust your money to an “expert.” They are unlikely to do any better than random.

Austrian business cycle theory (ABCT):

The Austrian business cycle theory (Ludwig von Mises, Theory of Money and Credit, 1912) explains how expansionary monetary policy leads to unsustainable investments (the boom), followed by a necessary correction (the bust). This has huge policy implications, but it’s also important for investors.

It taught me:

(1) Bull markets are headed for a correction when investments become unsustainable.

Signs of an upcoming correction may be:

high P/E ratios,

dumb projects getting funded, etc.

(2) Credit expansion (and associated inflationary policies) cannot be reversed. Don’t bet on fixed-return investments.

(3) All fiat regimes end lead to hyperinflation — so protect your assets from inflation. Stocks, precious metals, and Bitcoin provide protection from hyperinflation.

Modern portfolio theory (MPT):

MPT ( Harry Markowitz, “Portfolio Selection”, 1952) is a model to understand the relationship between investment risk and performance. Given a set of investment categories with a given risk and rate of return, you can graph all possible allocations of a set of investments on an efficient frontier: a hyperbola that represents a combination of investments that has the least risk for a given level of return.

It taught me:

(1) While you need to take more risks to get superior returns, you can get a free lunch if your risky investments are uncorrelated. Diversify your portfolio with non-correlated assets to maximize returns given a certain level of risk

(2) Lower your risk with a small allocation into safer assets with minimal impact on returns.


The capitalist-entrepreneur organizes capital and labor in new ways to make a profit. More generally, entrepreneurship is the activity of creatively organizing these elements to create value. (Ludwig von Mises, Human Action, 1949)

The reward for entrepreneurship is the profit the entrepreneur collects from the value he generates.

Everyone faces the decision to become a wage worker (employee) or entrepreneur. The upper end of the wages an employee collects is the value he creates for the business. The lower end is whatever another potential employee will offer for the same service — in other words, “what the market will bear.”

What this taught me:

No matter how much value I create for the business, my salary will always be limited to the market rates.

There are two ways to raise one’s income:

1: Redefine your job so that the pool of competitors is more exclusive.

2: Become an entrepreneur, so that your income is limited only by the value you create, not the prevailing wage.

In practice, I have done both in my life.

As an employee:

For example, I started my career as a software engineer. I then became a software architect, technology lead, director of marketing, then Chief Technology Architect. My strategy was guided by two questions:

1: how can I create more profit for the business and thus increase my value and

2: how can I limit the pool of competitors by working in a more exclusive role?

As an entrepreneur:

In contrast to employees, entrepreneurs can collect all the additional value they create (after expenses). Aside from a few exceptional careers (CEO, movie star, athlete, etc), entrepreneurship is the primary way to real wealth.

Ever since I discovered the role of entrepreneurship from the Austrian School of Economics, I’ve strived to engage in entrepreneurship even while I pursued my career. Currently, I do this as Managing Partner of Vellum Capital, a hedge fund specializing in cryptocurrencies.

Last word on Abundance:

Economics is all about the study of scarcity. Human beings have unlimited needs in a world with limited resources. The field of economics studies how to best allocate these limited resources to maximize human satisfaction.

But this focus on scarcity can lead us to miss another important lesson of economics. Value does not exist in nature but human beings. Human beings create value for themselves and others when they re-arrange capital and labor to produce goods and services.

While the elements of nature are finite, the potential value that humans can create is infinite. For example, some sand on the beach can provide momentary value when kids play with it. It can provide more lasting value when it is used to mix concrete for a building, or even more if the silicon is made into solar panels, or even more if the silicon is made into a million-dollar supercomputer. The combinations of labor and capital are infinite, and so is the value that they can create.

Economics is all about managing scarcity, but it teaches that the economy is not a fixed pie. Economic activity creates value rather than distributing it. The universe is full of opportunity, and we need only to develop an entrepreneurial eye for our small part of it, to learn how to profit from it.

Capitalism is (mostly) made from love

A car drove by today with the words “wealth is just stuff” plastered all over it. There is nothing wrong with “stuff” but this claim is wrong. Wealth is mostly made of love.

Most wealth is business ownership, not iPhones, Porsche, and private jets. Rich people stay rich because they invest the majority of their wealth in companies rather than fritter it all away on material possessions. Most business value comes from the relationships and goodwill it generates, not “stuff.”

For example, why is Apple worth $500 billion?

If you sold all the land, buildings, and computers that are the property of Apple Inc, you will not get back 1% of Apple’s value. The “stuff” behind wealth isn’t worth much.

Apple is valuable because of the relationships that its employees have with each other.
Apple is valuable because its employers love their jobs and the company they work for.
Apple is valuable because its customers (like me!) love its products.

Without loving employees or loving customers, Apple would be worthless – just a pile of “stuff” on dirt lots.
Capitalism is (mostly) made from love.

How to prepare for the coming economic meltdown

Predicting economic recession is like predicting earthquakes.  It’s impossible to predict when the next Big One will hit.  However, unless the fundamentals of local geology have changed, we should expect the past to follow the same pattern as the future.  And the last time I checked, Southern California hasn’t turned into an island, and the Fed is still wreaking havoc with interest rates.  The smart thing to do is to earthquake-proof your house — and your finances while you can.

Are you ready the next recession to wipe out half of your net worth?   Can you survive a decimated stock market, the loss of your job, and sky-high interest rates?

But wait, you say.  Things are going great.  The markets are up 249% since 2009, unemployment is low, and Bitcoin just hit $4000.  Why the gloom?

Predicting economic recessions is like predicting earthquakes.  It’s impossible to predict when the next Big One will hit.  However, unless the fundamentals of local geology have changed, we should expect the past to follow the same pattern as the future.  And the last time I checked, Southern California hasn’t turned into an island, and the Fed is still wreaking havoc with interest rates.  The smart thing to do is to earthquake-proof your house — and your finances while you can.

The recession is overdue

Historically, bull markets have lasted an average of 30 months.  We’re now at 100+.  During the average recession, the market falls 35%, but given the duration of the current run-up, and the malinvestment caused by the lowest interest rates in history, 50% or more is not unlikely.

Read Mr Money Mustache for more on this.

The worst that could happen

Here are things that could happen when the Big One hits:

  • Your stocks will lose half their value
  • You will lose your job (or customers, if you run a business)
  • Loans will become prohibitively expensive

While all these things probably won’t happen to you, everyone should perform a stress-test.  If you were to lose your job or business for an extended time, would your family be OK?  What’s your contingency plan?

If your business model or job depends on the availability of easy money, you will need to scramble to find a new career.  Mortgages, student loans, and auto loans are in an unprecedented 12-trillion plus bubble.  I would not want to go into these fields right now.

How to prepare

This post by Richard Reis contains pretty much everything you need to know

  1. Don’t hold an all-stock portfolio.  When your portfolio is down 50%, you need to think about buying, not selling.  That’s hard to do when you need the cash ASAP.  Bonds are the most cost-effective way to protect yourself.   In a recession, keep your stocks, and sell bonds first.  If you have minimal liabilities and a secure job, this percentage can be quite low.
  2. Save money while you can.  Now is the time to build up your savings.  Use your salary, bonuses, etc to grow your portfolio.  Saving may be much harder when the crisis hits.
  3. Diversify into non-market assets.   Hold some of your net worth in assets which have minimal correlation with markets – gold, property, Bitcoin, etc.
  4. Build an emergency fund.   My emergency fund is held in corporate and government bonds earning about 4.4%.  With my brokerage debit card, I can sell them and get cash in my hands within a business day.  Because I have no debts of any kind and few financial obligations, it’s only enough to pay for a few months food and rent.

Bitcoin won’t save you

Some people have analyzed the lack of correlation between the traditional and cryptocurrency markets and concluded that Bitcoin can hedge you from an economic meltdown.   I don’t agree with this.  There is no reason to think that short-term market fluctuations should be related to the Bitcoin price, but long term, I expect a strong correlation between traditional and crypto markets.   One of the biggest drivers of the Bitcoin price are low worldwide interest rates, leading individual investors to bet on Bitcoin.   This works as long as people have money to spare.  During a recession,  people will be scrambling to get money to keep their businesses, homes, and cars afloat.  Because crypto markets are still a tiny share of the total economy, they will be quickly drained of most of their value.   Only a minority of the value of Bitcoin is regularly traded, so it would not take much to crash the price to a fraction of its value

What should I do in a recession?

  • Buy everything!  The best time to buy anything – stocks, houses, employees to grow your company, etc, is when prices are depressed.  If you have the cash, the depths of a recession are the best time to buy it.
  • Don’t buy anything!  Waiting for a recession to start saving money is a terrible idea, but that describes you, you should minimize your spending while you still have an income to build an emergency fund.
  • Maximize your savings rate.  I lost over 60% of my portfolio in 2008-2009 recession, but by aggressively investing much of the salary in 2009, I made it all back and set myself up for a lifetime of financial security.
  • Don’t panic!  While everyone else was selling in 2008-2009, I started scrounging up money to invest.  I started buying in January 2009 – and saw my portfolio go down another 15%.   But I held on, and made a 58% return that year.

How to invest your money – from $25K to $5 million

Your first $25,000 should be invested in an all-market (VTI) or S&P 500 index fund (VOO) in your 401K or IRA.

Your first $500,000 should be invested in a broad market, low-cost, diversified portfolio of large/small cap and some international index funds.

After you reach $500k, you need to invest the majority of your portfolio into individual stocks. 
At this scale, tax efficiency becomes increasingly important, and you need an actively managed portfolio which optimizes the tax allocation of investments (growth stocks into taxable, REITs & bonds into 401K, etc), minimizes trading frequency, and practices tax loss harvesting (sell losses first to minimize capital gains tax). You can move your funds to a robo-trader and consider getting a dedicated advisor.

When your portfolio nears $1.5 million, avoid the tendency towards an overly risk-averse portfolio due to substantial swings in net worth caused by market volatility. Develop additional income streams from revenue-generating investments such as rental real estate, small businesses, etc.

Around $5 million, personally managing income streams may be an inefficient use of your time. Consider diversifying into hedge funds that offer positive absolute returns and research private equity opportunities which are promising and interesting to you. If you are older and your net worth exceeds $5.5 million, consider forming a trust fund to safely pass your fortune to your family.

Four secrets for getting the most out of your company’s 401(k)

Here’s how to get the most out of your company’s 401(k):

1 Set your savings rate high to max out your contribution early in the year

You can invest up to $18K per year into your 401(k) (plus $6,000 if you’re 50+).  Regardless of how much you plan to contribute, you don’t have to split your contributions evenly throughout the year.  If you set the savings rate high, you can invest the entire amount you plan to invest in your 401(k) early in the year, then save up for other goals for the rest of the year.   

I set the portion of my salary that goes into my 401(k) between 50% and 100%, depending on how much I have in my checking account.  Why do this?

401(k) contributions are taken before income tax deductions (but after social security and medicare).  If you allocate 100% of your income to your 401(k), you’ll see substantially more of your income go into your investments.  This allows you to keep your money in the market for a longer time.    (Note: verify that you will still get 100% of your company match if you do this.)

In my case, I qualified for my employer’s 401(k) late in 2016, and was just able to max it out by the end of 2016, and then maxed it out again in early 2017.  $18,000*2 = $36K.  The US market is up about 11.6% this year, earning me around four thousand dollars just for investing early.   I didn’t invest a penny more – I just invested earlier in the year.  Not every year will be so good, but overall, you’ll see a higher return by setting a higher savings rate to get your money in the market at the start of each year.

You might find it hard to live off a lower income for part of the year, but most people spent less after the end of the holiday season, and you may have a Christmas bonus to kick off the savings.

2 Choose low-priced index funds

The list of funds available for your 401(k) can be both imposing and disappointing.  If you have experience choosing your own investments, it is very likely that your preferred funds are not on the list.   Chances are that most of the options are overpriced – their expense ratio is higher than what you would pay in a typical investment account.     

My strategy for choosing what to invest in is simple: I look for the lowest cost index fund that matches my desired portfolio.  For example, my 401(k) has a “Nationwide S&P 500 Index A Large Cap” fund with an expense ratio of .6%.  The equivalent ETF from Vanguard charges only 0.04%.  So my 401(k)’s index fund has higher costs, but still much lower than 1.78% for some of the mutual funds my 401(k) offers.  Don’t just choose funds that happened to have the highest return this year.  They probably got lucky, and if they are mutual funds, the higher expenses will eventually probably lead them to underperform index funds.

3 Build a diversified portfolio and schedule rebalancing

Here is current 401(k) portfolio:  

  • 40% “S&P 500 Index A”
  • 40% “Small Cap Index A”
  • 20% “International Index A”

I built this in 30 seconds simply by searching for the word “index” in the list and verifying that these are the funds with the lowest cost on the list.  This is not a very scientific ratio, but it balances long-term performance with the risk from different market categories.  Whatever your risk tolerance, I suggest choosing several low-cost index funds that are different enough to offer diversification.   My 401(k) also allowed me to set up automated rebalancing every quarter to ensure that my portfolio sticks to this ratio.

4 Rollover your 401(k) into an IRA when you leave your job

Normally, you can rollover your 401(k) into an IRA when you leave your job. I was able to roll over my 403(b) (like a 401(k), but for nonprofits) last year when my existing employer switched to a new provider.  If you have a chance to rollover your company 401(k) to your preferred broker (see my post on choosing one), you should absolutely do so because:

(1) the IRA account providers out there (I suggest a robo-trader — I use Personal Capital) are almost certainly better than whatever your company uses – cheaper, with more investing options, and superior customer service
(2) you don’t want to leave a trail of isolated retirement accounts from each job over the course of your career, especially if you want to build a tax-optimized portfolio using a robo-trader that automatically allocates securities in a tax-efficient manner.

Caution: There are three reasons why you may not want to roll over your 401(k) if you’re toward the end of your career and have been with a company for a while: (1) some states (details here) protect 401(k) investments from creditors more than IRA’s (2) 401(k) allow current employees to delay required minimum withdrawals, and (3) 401(k) allow you to take penalty-free (but not tax-free) withdrawals after age 55 under certain conditions – but not IRAs.

Here is the best personal finance & budgeting app

I tested all the popular budgeting and personal finance tracking apps out there: Mint, Personal Capital, Truebill, Prosper Daily, Albert, Level Money, Proper Daily, and more.

These apps can connect to most banks and credit card companies to pull your transaction history and track your spending. Some of them can monitor and help you cancel recurring subscriptions, or recommend relevant (or not) financial products.

Most of the apps I tried ran into problems such as double-counting credit card charges and credit card bill payments, classifying bank or brokerage transfers as bills (Truebill), not showing pending charges or credit refunds, unable to connect to my bank (Level), or having an ad-bloated UI (Mint) or just confusing (Albert).

While Clarity Money and Prosper Daily were OK, Personal Capital has the most accurate total and is best able to break down both my monthly expenses and income into useful categories. Because it’s funded by its high-net-worth investment management service, it doesn’t try to constantly sell me credit cards or bank accounts like most of the other apps. Get it here.

As far as investments go, Personal Capital is also the only app to show a detailed breakdown of my investments and my net worth (both the money I have with them and elsewhere, and even assets such as a car or gold bullion). Mint is supposed to do that too, but trying to connect to my brokerage always errored out, and their support team was full of excuses.

The myth of rising house prices

One the biggest myths about buying a home is that it is an investment. An investment is an asset which tends to go up in market value over time. But consider what would happen if this were actually true: if home values increased faster than inflation, pretty soon no one could afford a home! In fact, home values for the most part barely keep up with inflation.

The math is complicated by a number of factors: the size of homes keeps getting larger, so comparing the average home price now versus 30 years ago does not mean that any specific home will be worth more. We pay a greater portion of our income for homes than before because we pay for more home — this is a change in personal tastes, not home values.

According to the Case-Schiller Index, the price of existing homes increased by 3.4% annually from 1987 to 2009, on average. The general rate of inflation during this time was 2.9%. The increase in cost of housing slightly outpaces income growth – mostly because of government policies intended to increase home ownership!

Of course some markets are hotter than others — but if gambling is your thing, you would get lower overhead from the stock market, or even the horse races! The CAGR adjusted yearly return of the stock market for the same period is 6.27% – versus .5% for the average home.

A letter to my broker on the Fiduciary Rule and the repeal of Dodd Frank

The CEO of my brokerage firm asked for my support in opposing the Trump administration’s plan to roll back the Dodd Frank Act and the Fiduciary Rule for retirement accounts, which would require brokers for retirement accounts to act in their client’s best interest. Sounds great, right? This is what I wrote in response: 

Dear [CEO’s Name],

Please allow me to share a few thoughts on your request as a client of [Firm Name]:

I appreciate that you believe that the Fiduciary Rule and the Dodd Frank Act are in the interests of consumers and the economy. I respectfully disagree.

Furthermore I think it is a bit irresponsible for you to advocate for these policies without admitting that [] has a personal financial interest at stake.

One of the selling points for [] is that your advisors are fiduciaries. I don’t need to tell you that the Fiduciary rule shook up the 401K/retirement industry and created an advantage for companies which already had a fiduciary policy for their clients. Firms like [] which did not have to make the switch had an edge in selling their products.

Now as to the wisdom of the Rule itself:

Personally, I value having a fee-only advisor who is legally bound to sell the best products for me. Yet this not necessarily true for everyone. A fiduciary advisor who cannot profit from selling securities directly must earn his living by charging an explicit fee for his services. This fee-only model is not suitable for everyone — especially investors who are just starting out.

I would not have made my first mutual fund purchase as a 16-year-old if not for the efforts of a commission-only advisor who taught me about the value of compound growth. Years later, as a financially irresponsible young professional who had failed at investing on his own, another commission-only advisor set me on the path to financial independence. While management fees would have discouraged me early on, at some point, without any legislative help, I recognized the value of a fiduciary advisor, and switched to your company on my own. Yet if it were not for the initial push and value of no-fee offering, my 16 year-old-self would probably not have started on this road.

While I would not advise anyone to use a commission-only advisor today, fee-only advisors are prohibitively expensive or unknown to many people with limited access or experience with the financial system, and I don’t like the idea of a legislative solution forcing a one size fits all fix on everyone. Furthermore, while a fiduciary is prohibited from *profiting* from his advice, the law can’t make him give *good* advice, so there is no guarantee that budget fee-only fiduciary advisors will offer better financial advice than commission-based advisors.

Now as to Dodd-Frank. This legislation is complex, and has many provisions, and I think it’s an oversimplification for you to simply say that that it “protects consumers” and will “prevent recessions”:

First, surely you don’t believe that Dodd Frank prevents *all* recessions, or even major recessions, or you would not be investing my money as you are [by putting a portion in safe, recession-proof securities]. Recessions have many causes, but the most common one is government policies — and there is no reason to believe that the Fed or other government institutions are any less likely to cause a recession in the future due to this legislation.

Second, as I’m sure you know, the financial industry was already heavily regulated prior to Dodd Frank, and the Act adds several more layers. We can debate just how much protection it adds, but all the numerous prior laws (starting with Glass-Steagall, etc) failed to stop recessions, bailouts, or bad behavior towards consumers, and there is little reason to believe that this time Congress finally fixed capitalism once and for all.

In fact, all this legislation created numerous additional costs which consumers ultimately pay for, and leads to regulatory capture — the most common way for financial institutions to mask their bad behavior. Without going into technical and historical detail, I believe the Dodd Frank Act created a lot of extra costs for consumers without much additional protection. This is why most banks eliminated freebies such as free checking and the community banks’ share of the lending market fell to just 20%. Surely companies with established and fell-funded compliance departments such as yours have an easier time complying with these rules than small startups who might try to compete with you.

To conclude, I do appreciate the fiduciary policy of [] and the legal protections for what others can do with my assets. Yet I dislike my money being used to advocate for overly simplistic and historically ignorant political solutions, especially when such advocacy comes with a conflict of interest.

How I learned to stop worrying about my credit and love plastic

Whether you’ve decided that you don’t need credit cards in your life, or stick to a single card you got in college, you’re making a big mistake. You need a proactive credit-building strategy.

Many millennials have opted out of the American dream of owning a house and filling it with stuff they can’t afford.  Perhaps you’ve decided that paying cash is a more responsible personal finance habit.  You may have looked at the wasteful spending habits if your friends and decided not to tempt yourself with a credit card.  Some friends have left university deeply in student loan and credit card debt, and decided to simply ignore it, hoping that it will be forgotten by the time they need to borrow money.

Whether you’ve decided that you don’t need credit cards in your life, or stick to a single card you got in college, you’re making a big mistake.  You need a proactive credit-building strategy.

There are many useful benefits to credit cards:

  • Consumer protection:  If you want to dispute a charge, credit cards offer far more protection than debit cards.  In some cases, card issuers actively investigate my cases even after pushback from the seller until I was satisfied.  You’re unlikely to get the same treatment from a bank.
  • Benefits: Many credit cards reward you for using them – with sign up bonuses, cash back, or travel points.  They may also provide insurance on purchases, price matches, a concierge service, or many other perks.
  • Emergency fund: In an emergency, credit cards offer immediate access to funds.  Sometimes it’s better to go into debt than  me unable to pay for urgent auto or medical expenses.
  • Cash flow flexibility: Credit cards allow me to separate by outgoing and incoming flows.  Though I pay off the balance every month, I only keep a bare minimum in my checking account.  Because all my purchases go on a credit card, I can buy what I need without worrying whether I have to cashout my investments to pay for it.
  • Travel: When traveling overseas, credit cards offer many benefits: one of my cards offers free international purchases – most debit cards charge 3%.  They will express me new cards if my wallet is stolen, help me find the service I want in almost any country, and provide car rental insurance, trip interruption insurance, and more.
  • Building a credit history: credit cards the the primary method to build a credit history. If you don’t trust yourself with credit, why should anyone else? For more, read on:

Three myths about credit cards and personal credit

Myth #1: I don’t need to care about my credit if I don’t need any loans

While getting out of debt is harder than building up a credit history from scratch, both can cause serious problems even if you don’t need to borrow money anytime soon:

  • Your credit history may be used when reviewing job applications, setting your auto insurance rate, evaluating apartment rental applications and the deposit amount, applying for a cellular contract, and much more.
  • Even if you don’t plan to take out a loan for many years, the longer your credit history, the higher your score, so it pays to start early.
  • Higher credit scores qualify you for lower interest and insurance rates, which can save a lot of money.
  • If you ever start a business and need a business loan, you need a personal credit history for business loans, purchases on credit, etc.

Your credit record is not a single number, as competing scores and versions of scores are used by different institutions.  Furthermore, banks will combine your public credit record with proprietary information to derive a custom score used to make decisions.  Building a good credit history focus each category in your credit record: paying bills on time, building a diverse credit history, and growing your available credit.

Myth #2 I need to take out a loan or keep a credit balance to build up a credit history

This is the most common bad advice you may have heard about credit.  When lenders decide whether to give your credit, they don’t care how much money you made other banks.  They only care whether you will cost them money – the chance that you will not repay your debts.  To prove that you are a good credit risk, you just need a history of financial responsibility.  A history of payments for mortgage, auto, or a student loan will improve your score, but it is not needed – I have an “excellent” credit score, and I’ve never paid interest for a debt.

Here is how to get a great credit score:

Step 1: Monitor your credit history

Begin by getting your credit score from CreditKarma.com, Wallethub.com, or Capital One Credit Wise These free services will show your latest credit score as often as every day, and alert you to any changes from their smartphone apps.  Your goal is to get an “Excellent” score for each “important” credit factor:


Step 2: Apply for a credit card if you don’t have one:

If you’ve never had a card before, check if your bank has a credit card.  NerdWallet has a review of 1700 cards.  The variety of cards on offer is overwhelming, and many people simply get the card offers they get in the mail.  That’s usually a mistake – the credit offers I get in the mail are always worse than the cards I selected through research.  Also, if you accept all the offers you see just for their sign-up benefits, you will end up spending much more than you intended.  Use a guide to pick a card suitable for your life situation.

Here’s some basic advice for different credit situations:

  • Poor or no credit: Get a secured no-fee card such as the Discover it® Secured Card.
  • OK credit: Chase Freedom (5% back on revolving categories)
  • Great credit: Blue Cash Everyday Card from American Express ($300 for signing up and 1-3% back) or Citi Double Cash Card (2% back on everything).

Personally, I use six cards with the Wallaby Mobile App, which detects when I’m visiting a store or restaurant and suggests the best card to use.  I get 5% back for many of my purchases, as well as benefits such as roadside service, free travel and theft insurance, no-fee foreign transactions, and a personal concierge to help with difficult purchases and resolving disputes.  When used responsibly, credit cards are actually pretty useful!

Step 3: Set up auto-pay to pay cards in full every month

The first thing I do when I get a new credit card is set up auto-pay to pay the amount in full each month. As explained above, keeping a balance won’t help your credit record.  In fact, it will lower your credit score by raising your credit utilization and you will pay a fortune in interest payments.

This advice goes for all other services and utilities as well.   Set up auto-pay and never worry about due dates.  For services which do not support direct debit, use bill pay service through your bank or Mint Bills, so you can pay them online with one click.

Step 4: Build your credit over time

Once you have a positive credit record, you can apply for new cards and increase the credit limit on existing ones.  Your credit utilization (the percentage of available credit that you’ve used) is a major factor in your credit score, so as long as you can use credit responsibly, increase it by occasionally applying for new card and requesting increases.  Cards with the best benefits typically require excellent credit, and it will take some time to build a suitable credit history.   While I’ve heard advice suggesting a six month wait between credit requests, in the last month, I asked for four credit increases this month, for up to 3X my previous credit limit, and was approved with only one hard credit pull.  

Myth #3: Credit card issuers want you deeply in debt so they can make money on fees and interest

Probably the main reason why people avoid credit cards is that they have a sleazy reputation for suckering people into unsustainable debt by leading them to buy stuff they can’t afford.   This is no doubt a serious problem for many people.   Yet people have been borrowing money to buy things they can’t afford as long as money has existed.   

The main source of income for credit card companies are transaction fees collected from merchants for credit card charges, not interest or fees.  Interest and fees are an important, but secondary source of income to them.   Sure, they would love for you to keep a balance, occasionally forget to pay the bill, and pay a bunch of fees.  Keep in mind though, that everyone loses when people can’t pay for their debts and have to have them written off.  Credit cards and banks want you to be financially successful and only a little bit irresponsible, not bankrupt.

The wide availability of consumer credit is a great innovation:  for the first time in history, most people in the developed world can buy goods and services on credit, just by swiping a plastic card.  The credit system is not perfect, but for the most part, it is fair, transparent, and convenient.   It’s certainly better than borrowing money from friends, family, or loan sharks.  Bad credit sucks, but at least no one will break your legs over it, and unlike a relationship destroyed by money between friends, you can recover from bad credit just by improving your financial habits.

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).


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.


  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!