Jonathan Clements's Blog, page 425

Risky Business

Is “smart beta” truly smarter and better?

The world of smart beta, sometimes called factor investing, used to be fairly easy to grasp. In 1981, academic Rolf Banz noted that small-company stocks didn’t just outperform their larger brethren. Rather, they outperformed by more than could be explained by their extra risk, as reflected in greater share price volatility. Similarly, in 1992, finance professors Eugene Fama and Kenneth French documented the strong performance of bargain-priced value stocks—and noted that this couldn’t be explained by volatility, either.

Those two insights prompted many investors to overweight both smaller-company stocks and value stocks. For everyday investors, the typical tack was to give their portfolios a tilt toward small and value stocks, by purchasing index funds that focused on these two areas. Some quantitatively driven money managers went a step further: They added a momentum overlay, favoring small stocks and value stocks that had recently outperformed, because there was also evidence that short-term winners continued to shine.

“This isn’t just some interesting academic exercise. Rather, it’s big business. Wall Street has been quick to exploit these insights.”

In the years since, researchers have documented a slew of additional factors. For instance, historically, you could have notched surprisingly good results by favoring securities characterized by lower price volatility, higher yields and higher quality (as reflected in, say, higher gross profitability or lower debt).

Researchers have found that favoring these factors can goose performance in the U.S. and foreign markets—and can help in picking stocks, bonds and currencies. But this isn’t just some interesting academic exercise. Rather, it’s big business. Wall Street has been quick to exploit these insights, most notably through a tidal wave of new exchange-traded index funds.

Has all this been overdone? Critics have noted that the funds often don’t fare as well as the research suggests. A recent Bloomberg Businessweek article questioned whether some of the factors identified reflected not disinterested research, but data mining. Even Vanguard Group founder Jack Bogle has chimed in against smart beta funds.

Are the critics right? For those of us without finance PhDs, this debate can be tough to sort out.

Back in the 1990s, I was more skeptical about factor investing, but I’ve slowly warmed to the idea. With factor investing, you’re taking human judgment out of the mix—and with it the potential taint of emotion—and replacing it with systematic investing based on historical evidence and academic theory. That seems like a far more promising approach than old school methods, such as trying to uncover market-beating stocks by reading SEC filings, interviewing company management and making financial projections.

Four Doubts. Today, in my portfolio, I own index funds that overweight value stocks and smaller-company stocks, both in the U.S. and abroad. I’m not 100% convinced this will boost my portfolio’s return. But I figure that, if I suffer a patch of underperformance, I’ll have the patience to sit tight, and the long-term damage, if any, will be modest. Why do I have doubts? There are four reasons.

First, by owning a portfolio that looks different from the broad market, I’m making a market bet—and I could be wrong. Don’t want to take that risk? My advice: Purchase a total U.S. stock market index fund, a total international stock index fund and a total bond market fund. With that combo, you’re guaranteed to outperform most other investors with a similar asset allocation, because their results will be dragged down by their higher investment costs.

That brings me to my second reason: These broad-based index funds are cheaper than factor-tilted index funds. That means that factor funds need to deliver not just superior performance, but performance that’s sufficiently superior to overcome their cost disadvantage. That cost disadvantage has lately looked slightly more daunting, as major index-fund providers engage in a price-cutting war to promote their flagship funds that track broad market indexes. In essence, many index-fund providers are using these broad-based index funds as loss leaders to attract new customers, who they hope will then buy more expensive factor-tilted index funds.

Third, we should never forget that we have only one history of capitalism. That history may be a rotten guide to the future. Perhaps the factors that have been identified are an historical quirk, not an enduring advantage.

“If there’s no added risk, it’s an easy choice for investors: They’ll realize there’s a free investment lunch to be had and flock to buy the stocks involved.”

Finally, markets are made up of humans—and humans learn. If a chance to beat the market is uncovered, folks rush to take advantage and the opportunity can quickly disappear. For instance, since Rolf Banz’s paper on the small-stock effect appeared in 1981, small stocks have outperformed blue chips, but the margin of victory has been modest. Could it be that the large historical outperformance by small stocks reflected not massively greater risk, but rather a mispricing—and that mispricing has now been rectified, as investors have learned about the small-cap effect and moved to take advantage?

That, in a nutshell, is the dilemma that all factors face. For a factor—whether it’s the small-cap effect, value, momentum or something else—to continue to deliver superior returns, it must involve added risk, for which investors are then rewarded. If that isn’t the case and there’s no added risk, it’s an easy choice for investors: They’ll realize there’s a free investment lunch to be had, they’ll flock to buy the stocks involved, the share prices will be bid up and future performance will be no better than the rest of the market.

So do these factors involve added risk? Again, go back to the small-cap effect. When modern portfolio theory was first formulated, it was assumed that risk was captured by volatility—and the surprise with small stocks was that their outperformance was larger than could be explained by volatility alone. The assumption: Something else must be going on, but nobody was quite sure what it was.

We have the same problem with the other factors that appear to deliver outperformance. Their outperformance can’t be explained by their greater volatility, so either there’s some risk involved that we don’t really understand—or there isn’t any greater risk involved, in which case the performance advantage probably won’t persist.

Embracing Risk. So where does that leave us? If something is obviously riskier, there should be a return advantage. That’s the case with stocks relative to bonds. Those who have a larger allocation to stocks can reasonably expect somewhat higher returns over the long haul. Similarly, within stocks, it’s pretty clear that smaller companies and emerging markets are dicier propositions than blue chip companies, so it seems reasonable to expect some extra return—even if the extra return from small stocks isn’t as great as history suggests.

But what about everything else? I’m not convinced there’s greater risk involved with, say, value stocks or stocks with short-term momentum. Instead, if there’s any reason these factors work, it strikes me that it’s probably behavioral.

Investors get too excited about growth companies, and pay too much for their stocks, and they’re too pessimistic about the prospects for value stocks, so there are bargains to be had. Similarly, momentum may reflect an excess of caution among investors, who are slow to change their minds when faced with a corporate turnaround, so it takes a while for good news to get fully reflected in a company’s share price. That doesn’t mean that value and momentum strategies won’t outperform over the long haul, but investors could overcome their behavioral biases—and the performance advantage may disappear.

Because of that risk, I wouldn’t bet the ranch on any factor. Instead, you might anchor your portfolio with a total U.S. stock market index fund, a total international stock index fund and a total bond market index fund. Want to be a tad more clever? Go ahead and add a few factor-tilted index funds—but realize you’re taking a risk that may not get rewarded.

Greatest Hits

These were April’s five most popular blogs:

Next to Nothing
Nothing Better
Ten Commandments
Retire to What?
Three Steps to Seven Figures

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Trust Issues

LIKE MOST PEOPLE, I’ve made my fair share of financial blunders. I’ve also had some successes. But I definitely spend more time beating myself up over my errors than celebrating my successes.

Undoubtedly, my biggest mistake fits into the relatively obscure category of asset location. If you aren’t familiar with the term, I can explain it by way of an example. Suppose you have two investment accounts: a retirement account and a standard, taxable account. In these accounts, you want to buy some stocks and some bonds, and you also want to hold some cash for a rainy day. The question: How much of which assets should you buy in each of your accounts? The answer hinges largely on taxes, but also reflects other factors. This is the heart of asset location.

My asset location error was straightforward: About five years ago, I had some money to invest and was thinking through various alternatives. At the time, my children were all under 10 years old, so I thought it would make sense to establish 529 college savings accounts for them. When I asked an estate planning lawyer, however, he steered me in a different direction. Don’t focus on college costs, he said. Instead, if you want to help your family, establish a trust that’ll protect your money from estate taxes. And that’s what I did.

There were at least four things wrong with this decision:

I gave up one of the greatest tax gifts the government offers. With 529 accounts, all gains are completely tax-free if used for qualified education costs. Suppose I had put $100 into an S&P 500 fund at the time. With the market’s gains, it would be worth about $160 today. If it were in a 529, I could withdraw those funds entirely tax-free. Without the benefit of the 529, though, those $60 of gains would be subject to taxes, leaving me with perhaps $145.


I prioritized a lower-probability occurrence over a higher one. Sure, estate taxes are real, but there are many unknowns. Among them: What will the tax rate be in the year that I die and, by that time, will I even have enough money left for the government to tax? By contrast, my children’s likelihood of going to college is (hopefully) very high, and it’s right around the corner. That should have been my priority.


I took one person’s advice without considering the context. To a hammer, everything looks like a nail. And to an estate planning lawyer, everything looks like an opportunity to save on estate taxes. He wasn’t wrong, but it was my job to consider the alternatives.


Trusts can be expensive. As their name suggests, trusts require trustees, and oftentimes they want to be paid. Meanwhile, 529 accounts are relatively cheap.

Asset location isn’t the most exciting topic in the personal finance world. But a little bit of attention to this seemingly dull topic could yield big benefits.

Adam M. Grossman’s previous blogs were Contain Yourself and Take It Slow. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning and investment firm in Boston.  He’s an advocate for evidence-based investing and is on a mission to lower the cost of investment advice for consumers.

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Talkin’ ‘Bout My Generation

YOU CAN TELL THE STORY of my generation in myriad ways—including through our evolution as investors. I entered the world of stock investing with the purchase of shares in Twentieth Century (now American Century) Select Fund. It was the summer of 1987 and I was 26 years old. By autumn, the stock market had crashed and the value of my shares along with it. It was the first of three major market declines that my generation would face. If there were ever a scenario for wanting to bail out of stocks, and avoid the turbulence of investing, this was it. But I stayed with it.

Back then, there was already a dizzying array of mutual funds. For a novice investor, it was overwhelming. Without the internet, fund research involved reading through personal finance magazines and checking the newspaper’s mutual fund results. You had to determine which had the best long-term record, what the investment style was and what was the minimum dollar investment required.

I don’t recall ever considering index funds. There were a few around, but they didn’t get the exposure that they do today and, besides, how boring is it to invest in an index fund when you have actively managed funds touting their superior returns? Over time, my savings went into other actively managed funds, ones that had high ratings. I would use dollar-cost averaging, putting in a set amount each month. All of it went into stocks. After all, I was young, with decades before retirement. After a few years, I started to diversify into actively managed international stock funds, large and small cap funds, growth and value funds.

It wasn’t long before I had my own dizzying array of funds that I invested in and had to monitor. There had to be an easier way. It was in the mid-1990s that I started to hear about index funds. Here was salvation: One could invest in funds that covered the broad spectrum of U.S. and international markets. The results would match the appropriate indexes. Nothing flashy. And the expenses were significantly lower than those of actively managed funds.

I joined millions of other investors in making the migration to passive investing. I switched my monthly investments over to index funds and started to rid my portfolio of those actively managed funds that performed poorly, moving the proceeds into index funds. I still own a couple of actively managed funds, which have proven to be winners, but today the great majority of my portfolio consists of index funds.

Bonds entered my portfolio as I entered my 40s and after going through the market crash of 2000-02. I wanted to be more conservative with my investing as I neared early retirement. And the market turbulence was giving me more than a few unsettled sleeps. My bond investments are all in bond index funds. With returns not as lofty as stocks, it’s especially important to be in index funds, with their low management fees.

My bond exposure increased to as much as 45% of my portfolio as I approached my late 40s, putting me in a relatively good position as we plunged into the 2008-09 Great Recession. Yes, the Great Recession was a gut-wrenching time, but I held my own, even investing in stocks as they tumbled in what seemed like an unstoppable downward spiral.

Now that the stock market has recovered and I am retired, I monitor my asset allocation to ensure that I am within range of my targets. The last thing I want is another sharp drop in the market. But having lived through the market turmoil of the past three decades, I’m confident I’ll stay the course, just as I did when I invested my first hard-earned dollars in 1987.

Nicholas Clements is one of Jonathan’s older brothers. An avid cyclist, Nick is retired and lives just outside Washington, DC. His previous blogs include Try This at Home and Retire to What?

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This Week/April 30-May 6

REVIEW THIS YEAR’S SPENDING. Which expenditures do you remember with a smile—and which prompt a shrug of the shoulders and maybe even a wince? To jog your memory, look back through your bank and credit card statements. Lavishing dollars on stuff you don’t enjoy? Maybe it’s time to change the way you spend.

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Playing Favorites

OTHERS ARE LUCKY. But we deserve every penny we have, right? The distinction between “just deserts” and “just plain lucky” strikes me as far messier than we might initially assume. Consider just some of the ways that we can be financially lucky or unlucky:

Birthplace. If we were born in the U.S. or another part of the developed world, we’re pretty much starting the 100-meter sprint within a few strides of the finish line, not only by historical standards, but also compared to the rest of the world. If that wasn’t the case, we wouldn’t be having a national debate over immigration.

Parents. Even within the developed world, some are born with far greater advantages than others. If our parents launch us into the adult world with some cash, a good education and no debt, we start life with a leg up on most of our fellow citizens.

To be sure, this advantage is frequently squandered. Affluence is often the death of financial ambition—and sometimes all ambition. This might fall firmly into the category of “First World problems.” Still, it strikes me that raising children in an affluent household, while still ensuring they have the drive to make the most of their abilities, is a tricky task.

Talents. In HumbleDollar’s April newsletter, I talk about how we’re constrained by the “hand we’ve been dealt.” Some are born with talents that are richly rewarded by today’s society; others aren’t so fortunate. But instead of gazing longingly at the fine cards held by others, we should focus on making the most of the hand we have.

Mentors. Our colleague—who works no harder and seems no better at his or her job—rises rapidly through the corporate ranks, while the rest of us are left behind. What made the difference? It could be as simple as personal chemistry: Maybe someone in senior management took a shine to this one employee and pushed for his or her promotion.

Health. No matter how careful some people are with their health, they spend their lives struggling with physical and mental ailments. And even if we enjoy good health, we could find ourselves responsible—financially and otherwise—for someone who isn’t so lucky.

Relationships. For those who are coupled up, the earning ability and spending habits of their spouse or partner can make a huge difference to their own financial success, and yet there’s a good chance we won’t have this information when we commit to one another. The reality is, we may not fully grasp our partner’s financial habits until we’ve been together for a few years—and it may be a decade or more before we know whether he or she will have a successful career.

Markets. If you retired in 2000, you would have struggled through a decade of lousy stock market returns, even as your own need for spending money drained your portfolio. By the time the current eight-year bull market kicked in, your savings might have been sadly depleted, thus limiting your dollar gains. None of this was your fault: It was just bad luck.

By contrast, if you had entered the workforce in 2000 and started investing regularly, you would have spent the next decade buying stocks at all kinds of prices, some high, some painfully low. But if you had stuck with it, you would have got your reward: When stocks took off in early 2009, you’d have had a healthy sum invested—and your money would have more than tripled over the next eight years, with any additional savings further padding your portfolio. None of this was due to your brilliance: It was just a lucky sequence of investment returns.

By talking about luck, I’m not denigrating financial success. I like to think that, with a tight grip on the purse strings and a modicum of common sense, everybody can be financially successful. But a little luck can make success a whole lot easier to achieve.

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Lessons Learned

I HAVE MADE SOME glaring investment mistakes over the years. For instance, in my 20s, I was too conservative. I opened an individual retirement account and regularly invested the maximum annual contribution in a mortgage-backed bond fund. I still think about how much further ahead I would have been, if I had invested more of the money in stocks.

In my 30s, I received a $5,000 performance award from my employer. I wanted to invest the money, but wasn’t sure how. A family member told me about a utility called Tucson Electric Power. A few years later, in early 1991, the company was forced into bankruptcy and I lost almost all my money. I learned three important lessons: Never take investment advice from family members or friends, owning individual stocks can be risky, and make sure your investment portfolio is diversified.

In my 40s, I regularly listened to a radio show devoted to investing. The show’s host gave on-air investment advice, and also had a newsletter I subscribed to. I learned a lot from him. For example, I heard for the first time about index funds and the importance of keeping investment costs low. But there was one problem: He was a market timer.

One day, I sat in my living room, listening to people call into the show and thank him for his latest market-timing call. I sat there, with a feeling of envy, wishing I were one of them. The next year, I received an investment newsletter alert in the mail about another market-timing prediction. This time, he gave a major buy signal for the Nasdaq and suggested buying an exchange-traded index fund now known as PowerShares QQQ. I wasn’t going to miss out on this call, so I invested $70,000, with an average cost of around $71 per share.

After I bought the QQQ shares, I couldn’t sleep at night. I realized I was outside my comfort zone. Something inside told me to go ahead, even though deep down I was afraid. Was it greed? Was it the fear of being left out?

This investment didn’t end well, either. The QQQ fell to $20 a share and took many years before it reached my breakeven share price. I learned an important lesson about trying to time the market. I also learned investing can be psychological. Sometimes, it’s hard to stop your emotions from getting in the way of making rational decisions.

With any luck, you will learn from my mistakes, just as I did. Today, I follow these four simple rules:

I make sure my investment portfolio has sufficient stocks for long-term growth, but I avoid taking an excessive amount of risk.
I don’t own any individual stocks. Instead, I invest primarily in index funds that own the broader market.
The only time I make any significant changes is when I rebalance my portfolio every year or so, to get my investments aligned with my desired asset allocation.
I try to control my emotions by tuning out all the noise about investing and instead concentrate on meeting my written financial goals.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance.

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Unconventional Wisdom

IN THE 1990s, when I started working fulltime, conventional wisdom suggested two possible routes to a comfortable retirement: Find a public sector job that offered a traditional pension plan or, alternatively, join the private sector and set aside 10% of my salary each year in my employer’s 401(k) plan. I was led to believe that if I followed either recommendation, I could sit back, let compound interest do its magic and achieve a financially secure retirement.

For 20 years, I followed conventional wisdom, assuming such one-size-fits-all financial advice would serve me well. My first job was at a public education institute and I was fully vested in the pension plan after five years. Next, I took a job at a private school where, as part of my benefits package, I had access to an employer-funded retirement plan. An amount equal to 10% of my salary was contributed to the account each month. I assumed there was no reason for me to make additional contributions to a retirement account. I also assumed the money in my employer-funded account could be invested in fairly low-risk options and still achieve a high rate of return. I imagined my life would remain on the same trajectory, and I’d glide through to retirement.

The problem with conventional wisdom: It only works if you lead a conventional life.

The stock market collapse of 2008 wiped out all the earnings that my retirement fund had accumulated over the previous decade. A midlife divorce meant forfeiting half of my pension. Suddenly, my life had taken an unconventional turn, and I realized the importance of going beyond basic rules of thumb.

I needed to educate myself on investment strategies. I learned women are generally more financially conservative than men, including favoring less risky investments. I learned that setting aside 12% to 15% of my income toward retirement would likely be necessary if I was going to retire at age 65, and I’d need to save even more if I wanted to achieve my goal of early retirement. I learned I needed to embrace the inevitable ups and downs of the stock market if I was going to earn investment returns that outpaced inflation and significantly boosted my nest egg’s value.

These days, I contribute 25% of my income to a retirement account that’s invested primarily in stock mutual funds. When the stock market takes a dive—as it did last year after the Brexit vote—I view it as an opportunity to purchase more shares with the same amount of dollars. More important, I’ve learned to ignore conventional wisdom and settle on my own financial rules.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Ore. Her previous blogs include My One and Only and Say It Forward.

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This Week/April 23-29

SET UP A HOME EQUITY LINE OF CREDIT. Be sure to read the fine print. But typically, all that’s involved is paperwork and perhaps a $50-a-year fee. Ideally, you’d never use the credit line. But it could come in handy if you have a financial emergency and as a lower-interest, tax-deductible alternative to car loans and education loans.

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Ten Commandments

IMAGINE YOU HAD ONE SHOT at offering financial advice to a high school or college graduate. Your mission: Come up with 10 rules that’ll help your graduate succeed financially in the years ahead. What would you recommend? Here’s my list:

1. Question yourself. No doubt you’re entering the adult world with a slew of strong opinions—about what you want from life, what will make you happy, what you’re good at, what constitutes success and how to achieve it. These opinions likely won’t age well, and yet they will have a profound impact on the lifestyle you pursue, how you invest, how much you borrow and more. What to do? Some self-doubt—and a few days’ pause before major decisions—could save you unnecessary grief and a boatload of money.

2. Consider the tradeoff. Whenever you open your wallet, you’re voting for one thing, but also voting against something else. If you buy one item, those dollars can’t be spent elsewhere. If you spend it, you can’t save it. If you devote savings to one financial dream, those dollars can’t be put toward another goal.

3. Be an owner. That means favoring stocks over bonds and buying a home rather than renting. Admittedly, this isn’t without risk: Owners can suffer steep short-term losses, so don’t purchase a house or venture into the stock market unless you have at least a five-year time horizon—and preferably far longer.

4. Favor simplicity and low cost. Wall Street firms want to make money off you—and the greater the complexity, the more they’ll make. Does a financial product or strategy require more than 30 seconds of explanation? Just say no.

5. Save automatically. If socking away money were easy, every retiree would be a multi-millionaire. The reality: Most of us spend too much today and shortchange our future self, especially our future retired self. To force yourself to save, sign up for payroll contributions to your employer’s retirement plan, and also establish automatic mutual-fund investment plans.

6. Pay taxes later. The biggest investment cost is taxes. But with 401(k) plans and IRAs, you can defer those tax bills for decades, allowing you to use money earmarked for the government to earn additional gains for yourself.

7. Index. If you buy and hold a globally diversified portfolio of index funds, every year you’ll fare modestly better than most other investors. Over a lifetime of investing, that modest annual advantage will turn into a landslide victory, thanks to the power of compounding.

8. Never carry a credit card balance. Follow this one rule, and you’ll sidestep punishing financing charges and a heap of stress. Avoiding credit card debt should be a top financial priority, second only to funding a retirement plan with a matching employer contribution.

9. Protect against financial disaster. Think about the truly terrible things that can happen—losing your job, needing expensive medical care, dying young, suffering a career-ending disability. To fend off these threats, you need an emergency kit with a few simple items: some rainy-day money, health and disability insurance, life insurance if you have dependents, a will, and the right beneficiaries on your retirement accounts and life insurance.

10. Strive to be debt-free. Many of us assume a frightening amount of debt when we’re younger, thanks to student loans, car loans and mortgages. This isn’t necessarily a terrible thing—as long as we can get all this debt paid off by retirement and preferably far earlier. Shedding all debt lowers our cost of living, make it easier to pay for the kids’ college, retirement and other goals.

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Three Steps to Seven Figures

I LIKE LEARNING from successful people. If you want to be good at something, why not hear from somebody who’s actually done it?

Back when it was first published, I read The Millionaire Next Door and became fascinated with these folks. Over the next couple of decades, I applied the book’s teachings and eventually reached millionaire status myself.

Along the way, I started writing about personal finance, combining my interest in millionaires with my passion for learning from experts. I have now interviewed more than 30 millionaires to see how they accumulated their wealth. Here’s what most of them have in common:

1. They earned good incomes. You can become wealthy with a moderate and even a low income, but those instances are rare. Many millionaires select high-paying careers and then work to grow their careers and income, including owning their own businesses.

Earning more not only allows millionaires to accumulate wealth faster, but also provides a higher standard of living along the way. In addition, a high income covers a multitude of financial sins, providing an extra cushion when the inevitable emergency arises or they want to splurge a bit.

2. They saved a high percentage. Millionaires save a good amount of their high incomes. Some save as little as 20%—yes, as “little” as 20%—while others are much more aggressive. Savings rates among millionaires seem to average more than 30%, with some at 50% or higher.

The variation is mostly dictated by when they want to retire. Those who want to reach financial independence faster save a much higher percentage. Those who are more moderate take longer, but get to spend more along the way. Still, the common thread is an unwavering dedication to saving.

My savings rate was just over 36% for most of my working career. A high income allowed this, without sacrificing my standard or living or the donations I like to make to charity.

While a high income is great, saving is vital. You can make $50,000 a year, save 20% and make more financial progress than someone who makes $500,000 and spends $500,000. No matter what you make, you need to save. Millionaires know this and limit their spending accordingly.

3. They invested early and often. Very few people can become wealthy by saving alone. It just takes too long. To reach millionaire status in a reasonable period of time, you need your savings to be working hard for you.

Millionaires have different ways of doing this, but many choose to invest in low-cost stock index funds. This is my investment of choice as well. Index funds all but ensure that, after expenses, you outperform most other investors. Yes, it’s a boring way to invest, but millionaires don’t care. They value results over style.

Millionaires also take advantage of what’s been called the eighth wonder of the world: compounding. By investing from a young age and leaving their money to grow, they have compounding working in their favor for years and even decades.

Using the three steps above—earning, saving and investing, or ESI—there are many paths to millionaire status. I call this “working the ESI scale.” One millionaire might make a huge income and save 20%. Another might make an average salary, but save 60%. Very few are Warren Buffetts, so almost no one becomes a millionaire through investing prowess alone.

Becoming a millionaire isn’t rocket science. The concepts are quite simple—and yet it’s still rare to become a millionaire. Why don’t more folks succeed? There’s one additional ingredient you need, but many people lack: You also have to have great discipline.

John Danger is a pseudonym. He’s an early retiree who achieved financial independence and now shares what has worked for him at ESI Money.com. To learn more about his philosophy, check out his free ebook, Three Steps to Financial Independence.

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