If You Can: How Millennials Can Get Rich Slowly

by William J. Bernstein

“History doesn’t repeat itself, but it does rhyme.”

The person who will not take a penny less than a certain fifty cents to avoid the coin toss has zero risk aversion; the person who will take a certain ten cents to avoid the coin toss is highly risk averse. This paradigm is a good way to think about your own risk aversion—that is, how much risk you can tolerate.)

there are only two kinds of investors: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third kind: those who know they don’t know, but whose livelihoods depend on appearing to know.

Microsoft Excel, so I’ve uploaded a spreadsheet that shows the effects of varying returns rates and saving rates in terms of real, accumulated assets after 20, 30, and 40 years to www.efficientfrontier.com/files/savings-path.xls. The name of the game is to accumulate around 12 years of living expenses (cells H12 to H16), which, combined with Social Security, should provide for a reasonable retirement. How did I arrive at 12 years of living expenses? The average person needs to accumulate about twenty-five years of living expenses, and I’m assuming you’ll be getting about half of that from Social Security.

Put another way, we often depend on the recommendations of others for, say, restaurants, movies, doctors, or accountants; when all your friends report favorably on one, there’s a pretty good chance that the recommendation is valid. Finance, though, for the reasons explained above, is the exact opposite; when all your friends are enthusiastic about stocks (or real estate, or any other investment), perhaps you shouldn’t be, and when they respond negatively to your investment strategy, that’s likely a good sign.

Once again, your homework in this section is a real piece of chocolate cake, Your Money and Your Brain, by the Wall Street Journal’s Jason Zweig; I can guarantee you that you’ll enjoy it immensely, and if Jason can’t save you from yourself, then no one can.

A frequent problem with 401(k) plans is the quality of the fund offerings. You should look carefully at the fund expenses offered in your employer’s plan. If its expense ratios are in general more than 1.0%, then you have a lousy one, and you should contribute only up to the match. If its expenses are in general lower than 0.5%, and particularly if it includes Vanguard’s index funds or Fidelity’s Spartan-class funds (which have fees as low as Vanguard’s), then you might consider making significant voluntary contributions in excess of the match limits. For most young savers, fully maxing out voluntary 401(k) contributions (assuming you have a “good” 401(k) with low expenses) and the annual Roth limit will get them well over the 15 percent savings target.