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and estate planning. Peter offers this same
and estate planning. Peter offers this same
Along the way, we also learned a vitally important lesson: we’re not rewarded when we do the right thing at the wrong time.
combination of living in America, some lucky genes, and compound interest.”
By starting earlier, the compound interest he earns on his investment adds more value to his account than he could ever add on his own. By the
You’re never going to earn your way to financial freedom. The real route to riches is to set aside a portion of your money and invest it, so that it compounds over many years. That’s how you become wealthy while you sleep. That’s how you make money your slave instead of being a slave to money. That’s how you achieve true financial freedom.
Some say you should have a nest egg that’s ten times what you earn currently. Others, who are a bit more realistic, say you’ll need fifteen times. In other words, if you’re making $100,000, you’ll need $1.5 million.
In reality, the number you should really aim for is 20 times your income.
Money: Master the Game,
First, you’ve got to save and invest—become
Now that you’ve saved it, where are you going to invest for the maximum returns so that you reach your target faster? The single best place to compound money over many years is in the stock market.
financial winter comes, on average, every year.
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least 10% from its peak, it’s called a correction—a
20% from its peak, it’s called a bear market.
the biggest danger isn’t a correction or a bear market, it’s being out of the market.
on average, there’s been a market correction every year since 1900.
Historically, the average correction has lasted only 54 days—less than two months!
But it’s important to note that, in the average correction over the last 100 years, the market has fallen only 13.5%. From 1980 through the end of 2015, the average drop was 14.2%.
Freedom Fact 2: Less Than 20% of All Corrections Turn Into a Bear Market
Freedom Fact 4: The Stock Market Rises over Time Despite Many Short-Term Setbacks
Despite a 14.2% average drop within each year, the US market ended up with a positive return in 27 of the last 36 years.
Freedom Fact 5: Historically, Bear Markets Have Happened Every Three to Five Years
the S&P 500 has dropped by an average of 33% during bear markets.
“The best opportunities come in times of maximum pessimism.”
2000 – 2001 546
The market always looks to tomorrow. What matters most isn’t where the economy is right now but where it’s headed. And when everything seems terrible, the pendulum eventually swings in the other direction.
protect yourself against this sort of disaster by building a portfolio that’s broadly diversified globally and
The Greatest Danger Is Being out of the Market
sitting on the sidelines even for short periods of time may be the costliest mistake of all. I know this sounds counter-intuitive, but as you can see in the chart below, it has a devastating impact on your returns when you miss even a few of the market’s best trading days.
10 best days in the market over the last 20 years occurred within two weeks of the 10 worst days. The
most fundamental rules for achieving long-term financial success is that you need to get in the market and stay in it, so you can capture all of its gains.
This mythical investor, who perfectly timed the market for 20 years running, ended up with $87,004. The investor with the worst timing—let’s call him Mr. Hapless—invested all of his money on the worst possible day each year: the day when the market hit its exact high point for that year. The result? He ended up with $72,487.
The lesson? If you stay in the market long enough, compounding works its magic, and you end up with a healthy return—even if your timing was hopelessly unlucky.
actually healthy to fear: financial firms that charge clients like you and me outrageous fees for lousy performance.
But the average fund charges you about 2% per year in costs, which drops your average annual return to 5%. At that rate, “you get 10 dollars. So 10 dollars versus 30 dollars. You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return!”
But it turns out that the professionals aren’t really any better at predicting the future than the rest of
So what’s the antidote? Index funds take a “passive” approach that eliminates almost all trading activity.
CORE PRINCIPLE 1: DON’T LOSE
“Rule number one: never lose money. Rule number two: never forget rule number one.”
“Don’t even bring me an investment idea unless you first tell me how we can protect against or minimize the downside.”
But the best investors don’t fall for this high-risk, high-return myth. Instead, they hunt for investment opportunities that offer what they call asymmetric risk/reward: a fancy way of saying that the rewards should vastly outweigh the risks. In other words, these winning investors always seek to risk as little as possible to make as much as possible. That’s the investor’s equivalent of nirvana.
“What five-to-one does is allow you to have a hit rate of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose.”
One way to achieve asymmetric risk/reward is to invest in undervalued assets during times of mass pessimism
I have enough money to retire and live comfortably for the rest of my life. The problem is, I have to die next week. —ANONYMOUS
CORE PRINCIPLE 4: DIVERSIFICATION
Diversify Across Different Asset Classes. Avoid putting all your money in real estate, stocks, bonds,
Diversify Within Asset Classes. Don’t put all your money in a favorite stock such as Apple, or a single MLP,
Diversify Across Markets, Countries, and Currencies Around the World. We live in a global economy,
