You Only Live Once

credit: http://www.flickr.com/photos/49568889@N08/7684077336/sizes/m/in/photostream/

I’m a HUGE fan of Lonely Island. Came across this awesome music video titled YOU ONLY LIVE ONCE, feat Adam Levine and Kendrick Lamar (who?).

I love it because it makes fun of people who take risk a little too seriously (“Two words about furniture: KILLING MACHINES!!”).

But while we scoff at the idea that we should stop going to clubs because loud music is bad for your ears, it amazes me that so many young people adopt that very same mindset when it comes to investing.

Here’s an interesting thought: Investing in the stock market is risky in the short run, but it’s the safest investment you can have in the long run.

The stock market is risky in the short run

Let’s tackle the first half of that last para first. Check out the returns from the stock market’s five worst years, from Financial Ramblings:

  1. 1931, -52.7%
  2. 2008, -33.8%
  3. 1930, -33.8%
  4. 1937, -32.8%
  5. 1974, -27.6%

So yep, in the very short term, buying and holding stocks is risky. Based on what history tells us, you could lose as much as half of your portfolio in a single year – Investors sure as hell weren’t popping champagne in 1931.

But it kicks ass in the long run

But it’s a very different story when you’re holding stocks for long periods of time.

Jeremy Siegel (whose classes I used to crash in college to leech off his market insights – woot woot!) argued in Chapter 2 of his book Stocks for the Long Run, that with a sufficiently long holding period, stocks are actually less risky than bonds.

According to Wikipedia, “During 1802–2001, the worst 1-year returns for stocks and bonds were -38.6% and -21.9% respectively. However for a holding period of 10-years, the worst performance for stocks and bonds were -4.1% and -5.4%; and for a holding period of 20 years, stocks have always been profitable.” Bonds, however, once fell as much as -3% per year below inflation.

In short, Siegel found that if you held stocks for 17 years or more, you never lost money even in the worst case scenario. 

Okay, so critics might claim that his findings are way too optimistic, and that the stock market’s prosperity in the 20th century may not necessarily repeat itself. But what’s the alternative? Investing in scammy gold buyback schemes?

The truth is, based on any historical record so far, the safest, and best, long-term investment for most young people has clearly been a diversified portfolio of stocks. Yes, even after you account for the stock market crashes in the past couple of years.

Young Heart, Run Free

And therein lies the awesomeness of being young and sexy – as young people, we have the luxury of having enough time. Enough time for a long career of earning money ahead of us. Enough time to hold on to our stocks without worrying about their fluctuations in any given day/month/year, knowing fully well that in the long run, we’ll come out on top.

So please. Stop getting intimidated by the stories of banks failing, and quantitative easing, and Justin Bieber’s Twitter account getting hacked. These are all short run risks (especially if you’re Justin Bieber), which are irrelevant if you’re holding out for the long term.

Take a little bit of risk in the short run to enjoy some awesomeness in the long run.

You only live once.

Image credit: TheOnyxBirmingham

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The New Psychology of Spending Money

So last weekend, I met up with a friend who’s kind of a huge foodie, like she wouldn’t think twice about dropping 200 bucks for a meal at a restaurant. She’s really fussy about her food, which I can never understand because I pretty much eat anything. Except papayas, they’re gross.

Anyways, this friend was thinking about checking out this flashy new Michelin Star restaurant that just opened. She was excitedly telling me about her plans, but abruptly stopped herself and said, “But you probably wouldn’t approve.”

I was a little taken aback. Why wouldn’t I approve? “Because you’re all about saving money and personal finance,” she retorted.

And then it struck me: Most people believe that “personal finance” and “spending money” are polar opposites. This couldn’t be further from the truth – I’ll tell you exactly why following a personal finance system means you can spend on what you love (and no, you don’t have to wait till you’re all white-haired and wrinkly).

The Toilet Paper Thief vs The Guy Who Spends On What He Loves

Let’s compare 2 friends – we’ll call them Mike and Paul. Mike is your typical frugal saver. He doesn’t have a personal finance system but he tries his best to save more. He cooks ramen at home to save money. He takes the bus instead of the subway so he can cut 10 cents per day on his trip to the office. He wears the same pair of jeans every time he goes out. When he goes travelling, he steals the toilet paper and soap from the hostels. He picks up 5-cent coins from the ground.

Paul doesn’t scrimp as much as Mike does. In fact, he spends on what he loves. Paul manages to do this because he has a kickass personal finance system: He’s automatically saving and investing pre-determined amounts every month. He’s automated his credit card and phone bills so he never has to worry about missing a payment. He’s set aside “Big Play” money for parties and vacations.

Once all that is done, Paul has a few hundred dollars left over each month which he can spend on the things he loves, no matter how much they cost: Clothes, meals, drinks, massages – in short, everything that makes it awesome to be young.

Paul doesn’t break a sweat if his cash runs out before the end of the month. He simply stays home, cooks, and reads a free book to pass the weekend. In a couple of days, he’ll receive his next monthly salary, automatically save/invest/pay off his bills, and with the amount of money left over, continue spending on the things he loves.

Who do you think leads a richer life?

Old Psychology vs New Psychology

Most people assume that just because I write about saving and investing, I’m one of those crotchey old personal finance dudes, hobbling around with a gin and tonic in one hand, nagging people to stop spending money. That’s the old psychology of spending money, the one that most clueless people mistakenly follow.

There’s a new psychology of spending money: If you’re faithfully following a personal finance system, you’re allowed to spend on anything you want with the money left over.

In the past 2 months, I’ve had a $325 dinner, went on a $3,505 vacation, bought a new Amazon Kindle, and last night, I paid as much as $14 for a beer (that last one was totally not worth it). I did all of the above absolutely guilt-free, because I’ve built, and followed, a personal finance system that takes care of my saving, investing and payments.

There’s a key difference between the following two statements:

Crotchy Personal Finance Dudes (like Mike): “I will never ever spend on a $200 dinner”

People who read Cheerfulegg.com (like Paul): “I’ll totally spend on a $200 dinner, as long as I can afford it after I’ve saved and invested.”

Which person would you rather be?

PS: Leave a comment or send me an email (cheerfulegg@gmail.com) on how you feel about spending money. What do you spend on and why? What is the one biggest thing you struggle with when it comes to spending? What would you like to learn from my blog to help you overcome it?

Taking A Break

In case you’re wondering, I haven’t disappeared off the face of this earth yet – I’m just on vacation on the West Coast of USA, and I didn’t have time to blog this before I left.

In the past 9 days, I’ve covered LA, Vegas, the Grand Canyon and Monterey; and I’m now on the final leg of my trip in San Francisco. Pretty much loving the Californian weather, the long drives, and the FOOD right now.

Will be back to my usual blogging routine in early September – In the meantime, here are a couple of interesting reads I’ve come across in the past couple of weeks:

1. The Big Lie About Engagement Rings – anyone thinking about proposing / getting proposed to should read this.

2. The Disciplined Pursuit of Less from the Harvard Business Review. Great article describing how we should be decluttering our lives – not just in the usual time-wasters, but also saying no to some terrific opportunities if we don’t absolutely want/need them. Kind of ties into my recent Revenge of the Ping post too.

3. How To Do Presentations That Don’t Induce Suicide – awesome presentation about… how to do a presentation

Till next week! 🙂

Never Take Financial Advice from a Supervillian

I just caught the Dark Knight Rises last week. Okay, it wasn’t a terrible movie, but it’s just riddled with plot inconsistencies that I couldn’t resolve, like (SPOILER ALERT):

1. Why is there a random-ass prison in the ground, in the middle of some foreign desert, with no warden, no food, and a bunch of prisoners cheering each other on? And how did Bruce get to Gotham in like, 2 hours after escaping from said prison?

2. Once Talia dies a terribly unconvincing death, which eliminates the bomb’s mystery triggerman, why didn’t Batman just haul the damn bomb to the sea in the first place? (which would leave him a lot more time to make out with Selina Kyle?)

3. How was Jonathan Crane (Scarecrow in the first movie) planning to exile its rich citizens in the summer? (“You are condemned to exile… by swimming!” Wtf).

Stupidest Supervillian Financial Plan Ever

But the biggest plot inconsistency for a financial nerd like myself came from Bane’s hairbrained plan to bankrupt Bruce Wayne.  (Hat tip to this article from theatlantic.com).

  1. Take over the entire Gotham Stock Exchange
  2. Hack into Bruce Wayne’s account
  3. Buy lots of puts on futures that expire at midnight.
  4. Bankrupt Wayne so he’ll have to read cheerfulegg.com to learn how to get rich again

Let’s examine the loopholes in this plan. First, there’s absolutely no reason for Bane to hold the Gotham Stock Exchange hostage in order to break into Bruce Wayne’s account. A more subtle (and less risky) plan would involve breaking into Wayne’s brokerage, which probably isn’t located within the Exchange. Or better still, hire a hacker to break into his account online – certainly affordable for Bane’s considerable financial resources.

(Okay fine – a scene of Bane carefully keying in his banking token code into gothamnationalbank.com wouldn’t nearly be half as dramatic, and wouldn’t  make for good entertainment.)

Sexy Doesn’t Always = Smart

The biggest thing I’m confused about is Bane’s decision to buy a whole bunch of puts on Wayne’s account. If you don’t know what a put is, it’s a fancy-schmancy financial instrument that lets you profit when stocks go down (yes, they exist). And buying a whole bunch of them means you make a loooooooot of money when stocks crash – which is exactly what would happen if the stock exchange is under a supervillian attack. So Bane’s plan would actually have the opposite effect of what he intended – he would make Bruce Wayne so insanely, ridiculously rich that he could have outsourced the saving of Gotham to Spiderman or the Avengers.

My guess is that the scriptwriters just wanted to include the use of the word “puts” into the plot, because they sound oh-so-sexy. But as I’ve often blogged, the sexy thing isn’t always the smart thing to do. In fact, the unsexiest things you could do in personal finance are usually the smartest moves you could make:

1. Automatically saving a fixed amount every month, increasing it when you have an income increase,

2. Dollar cost averaging into a sensible portfolio of index-tracking ETFs.

3. Automatically paying off your credit cards in full every month to build your credit score, so you’ll get a lower interest rate if you ever need to borrow to buy a car/house/business.

Not nearly half as sexy as investing in hedge funds, or studying things like “delta” and “gamma”, or trading on volatility, or holding a stock exchange hostage, but they’ve proven to work over and over again. As Ramit Sethi often says:

“Do you want to be sexy, or rich?”

Wake Up in the Morning Feelin’ Like P Diddy

Okay, you’re not the only one who has no freakin idea what those lyrics are supposed to mean (This intellectual forum discussion doesn’t really give me any clue). Oh Ke$ha, you have such impenetrable philosophies.

Of course, not many of us get up on a mattress made of cash and surrounded by hot chicks, so I guess it must be really hard to relate. Instead, the alarm clock jolts us out of an uneasy sleep on a Monday morning, we stumble out of bed, hit the shower, and commute to work surrounded by other sleepy, smelly people who are just as depressed as we are.

There’s a better way to live our mornings. Ever had those couple of things you always wanted to do but never had the time? I’m not talking about the billion things in your work to-do list; I’m talking about things that are actually awesome: Reading that book you always wanted to, exercising, watching that TED talk, spending more time with the kids, or if you’re nerdy like me: researching your investments and optimizing your credit cards.

Laura Vanderkam recently wrote an article on what the most successful people do before breakfast. It turns out that mornings are the perfect time for you to get things done – you’re more rested, more alert, have more willpower, and are less likely to be interrupted. She talks through 5 steps to getting the most out of your mornings: 1. Track your time, 2. Picture the perfect morning, 3. Think through the logistics, 4. Build the habit, 5. Tune up as necessary. Essentially, it’s pretty similar to what I’ve blogged about building up effective habits – start tiny, and then tune upwards as you get more successful.

I decided to try it out. My office is literally located in one of the most remote, desolate, and depressing parts of Singapore. Yes, it’s true. Don’t ask me why. However, one of the advantages of working at the end of the world is that I have an 1 to 1.5 hour-long commute every morning. While most people see it as a pain in the ass, I’m using it as a perfect opportunity to read, pray, meditate, or work on other projects. (Here’s a little secret – I’m currently using my mornings to work on a special project on the side, which you’ll hear about in the coming months!) I don’t try to accomplish too much – usually a couple of pages of reading, or baby steps in my special project, or one TED talk. But do them every weekday, and they start to add up. And I get to the office refreshed, inspired, and cheerful that I’m doing something meaningful in my life other than working for the man.

The number one reason why I’m able to accomplish my morning ritual: SLEEP. I try to get at least 7 hours of sleep every day so I don’t end up feeling exhausted during my commute.  (Okay, admittedly, I fail at getting my requite hours of sleep 2 days out of 5, but it’s all good as long as I fix it the following night)

So – try it out. See if it works. You never know – your morning ritual could let you wake up feeling like P Diddy after all 🙂