Returns Can Disappoint for a Long Time

Investing can disappoint for long periods of time.  There is no rule that says that over the next 10, 20, 30 years or more, stocks have to return 10%, bonds have to return 7.5% (while also being a strong diversifier for stock risk), and inflation has to come in at a tame 2-3%.  All of us, from the investment industry down to individuals, have a rosy picture of how fruitful investing can be.  The last 30-40 years really were a golden era for investment returns. 

Skill, Luck, & the Kelly Criterion

How do we know if we have skill or are just plain lucky?  Unfortunately for our self-esteem, many outcomes are more determined by luck than by skill.  How do you know when an activity is driven by luck versus skill?  Easy: if there’s a way to purposely lose, then skill plays a large role.  If there isn’t, then luck clearly plays a large role.  Understanding the difference is crucial, as skill-based activities allow you to assess potential outcomes and anticipate results.  Luck-based activities are much more difficult to assess – you are just as likely to be misled by the data and there’s no way to determine if your process is well-constructed or poorly-constructed.

Never Touch the Principal

Building multi-generational wealth means keeping what you save and investing it well.  Doing this means minimizing how much of the principal you withdraw to fund your lifestyle, at least once you’re living off of your investments.  In an ideal world, not only do you have enough capital saved to only use the income and never use the principal for living expenses, but you have enough left over to continually reinvest and grow your portfolio as well.  Once you have reached that point, and assuming your family doesn’t screw it up down the road, then your family will be well setup for the future.  Your principal is the beginning of your orchard or your garden.  From it, all else grows.

Choose Roth over Traditional – But Only When You’re Young

Roth accounts (IRAs and 401ks) and traditional accounts both have their time and place.  For young professionals, choosing a Roth over a traditional account makes sense.  However, as you advance along your career path, earn more money, and build capital, the value of a traditional account over a Roth becomes clearer.  My advice is to use the Roth when you’re in your 20s, but then make the switch to a traditional when the tax benefits of a current deduction outweigh the Roth’s benefits.  Let’s take a look at why that makes the most sense.

Secure Your Retirement Income (Part 2)

Warning: This post has a heavy dose of math, and plenty of highly specific details relating to retirement income.

Disclaimer: The article below discusses certain investment strategies, some of which I am currently using in my personal portfolio and some of which I am not.  Do your own due diligence before making an investment decision.  It’s your money; you’re the best person to judge what is best to do with it.