I Will Teach You To Be Rich: No guilt, no excuses - just a 6-week programme that works

by Ramit Sethi

Conscious spending isn’t just about our own choices. There’s also the social influence to spend. Call it the Sex and the City effect, where your friends’ spending directly affects yours. Next time you go shopping, check out any random group of friends. Chances are, they’re dressed similarly, even though chances are good that they have wildly different incomes. Keeping up with friends is a full-time job. Too often, our friends invisibly push us away from being conscious spenders.

Conscious spending isn’t about cutting your spending on everything. That approach wouldn’t last two days. It is, quite simply, about choosing the things you love enough to spend extravagantly on – and then cutting costs mercilessly on the things you don’t love.

The mindset of conscious spenders is the key to being rich. Indeed, as the researchers behind the landmark book The Millionaire Next Door discovered, 50% of the more than 1,000 millionaires surveyed have never paid more than $400 for a suit, $140 for a pair of shoes, or $235 for a wristwatch. Again, conscious spending is not about simply cutting your spending on various things. It’s about making your own decisions about what’s important enough to spend a lot on and what’s not, rather than blindly spending on everything.

You place a higher premium on the things you pay for out-of-pocket than things via subscription.

Fixed costs Rent, utilities, debt, etc. 50–60% of take-home pay Investments Pension, ISA, etc. 10% Savings goals Vacations, gifts, mortgage deposit, emergency fund, etc. 5–10% Guilt-free spending money Dining out, drinking, movies, clothes, shoes, etc. 20–35%

Finally, once you’ve gotten all your expenses filled in, add 15% for expenditures you haven’t counted yet. Yes, really. For example, you probably didn’t capture “car repairs”, which can cost £400 each time (that’s £33/month). Or dry cleaning or emergency vet care or charitable donations. A flat 15% will likely cover you for things you haven’t figured in, and you can get more accurate as time goes on.

(I actually have a “stupid mistakes” category in my money system. When I first started this, I saved $20/month for unexpected expenses. Then, within two months, I had to go to the doctor for $600 and I got a traffic ticket for more than $100. That changed things quickly, and I currently save $200/month for unexpected expenses. At the end of the year, if I haven’t spent it, I save half and I spend the other half.)

This bucket includes the amount you’ll send to your pension scheme and stocks and shares ISA each month. A good rule of thumb is to invest 10% of your take-home pay (after taxes, or the amount on your monthly salary) for the long term.

The 60% Solution You’ve heard me talk about the 85% Solution, which focuses on getting most of the way there — until it’s “good enough” — rather than obsessing about achieving 100%, getting overwhelmed and ending up doing nothing at all. Well, Richard Jenkins, the former editor-in-chief of MSN Money, wrote an article called “The 60 Percent Solution”, which suggested that you split your money into simple buckets, with the largest, basic expenses (food, bills, taxes), making up 60% of your gross income. The remaining 40% would be split four ways: 1. Retirement savings (10%) 2. Long-term savings (10%) 3. Short-term savings for irregular expenses (10%) 4. Fun money (10%) The article has been widely distributed, although curiously, none of my friends had heard of it. My Conscious Spending Plan relates to Jenkins’s 60% Solution, but it’s more focused toward young people. We spend a huge amount on eating out and going out, whereas our housing costs are lower because we can share apartments and rent more comfortably than older people with families.

Gifts for friends and family. Life used to be simple. The holidays meant presents for my parents and siblings. Then my family grew with nieces, nephews and new in-laws. Suddenly I need to buy a lot more gifts every year. Don’t let things like gifts surprise you. You already know the common gifts you’ll buy: holiday and birthday presents. What about anniversaries? Or special gifts like graduations? For me, a Rich Life includes preparing for predictable expenses so they don’t surprise me. Planning ahead isn’t “weird”, it’s smart. You already know you’re going to buy Christmas gifts every December! Plan for it in January.

Let’s take an example: Brian takes home £48,000 per year after taxes, or £4,000/month. According to his Conscious Spending Plan, here’s how his spending should look: ▪ Monthly fixed costs (60%): £2,400 ▪ Long-term investments (10%): £400/month

▪ Savings goals (10%): £400/month ▪ Guilt-free spending money (20%): £800/month Brian’s problem is that £800 isn’t enough for his spending money. When he looks at what he spent for the last couple of months, he finds that he actually needs £1,050 every month for spending money. What should he do? Bad answer: Most people just shrug and say, “I dunno”, while stuffing their face with an English muffin and then logging onto Reddit to complain about the economy. They’ve never thought about getting ahead of their money, so this is totally foreign to them. Slightly better, but still a bad answer: Brian can decrease his contributions to his long-term investments and savings goals. Sure, he could do that, but it will cost him down the line. A better way is to tackle the two most problematic areas in his monthly spending: monthly fixed costs and guilt-free spending money. Good answer: Brian decides to pick his three biggest expenses and optimise them. First, he looks at his monthly fixed costs and realises that because he’s been consistently paying the minimum monthly payment on his credit card debt at 18%, he has £3,000 of debt left. Under his current plan, it will take him about twenty-two years and cost him £4,115 in interest to pay off his debt. But he can call his credit card company to request a lower interest rate (see page 40 for details). With his new lower credit card APR of 15%, it will take him eighteen years and he’ll pay £2,758 in interest. He saves fifty-three months ...

Try focusing on Big Wins that will make a large, measurable change. I focus on my critical two or three Big Wins each month: eating out, clothes and travel. You probably know what your Big Wins are. They’re the expenses you cringe at, the ones you shrug and roll your eyes at, and say: “Yeah, I probably spend too much on_______

Three to six months before your review: Become a top performer by collaboratively setting expectations with your boss, then exceeding those expectations in every way possible. One to two months before your review: Prepare a “briefcase” of evidence to support the exact reasons why you should be given a raise. One to two weeks before your review: Extensively practise the conversation you’ll have with your boss, experimenting with the right tactics and scripts.

Unexpected one-time income. Sometimes money falls in your lap, like a birthday gift, a tax rebate or an unexpected freelance contract. Believe it or not, I don’t encourage you to save all of this money. Instead, whenever I receive money I didn’t expect, I use 50% of it for fun – usually buying something I’ve been eyeing for a long time. Always! This way, I keep motivating myself to pursue weird, offbeat ideas that may result in some kind of reward. The other half goes to my investing account.

Raises. A raise is different from one-time income because you’ll get it consistently and it’s therefore much more important to do the right thing financially. There’s one key thing to remember when you get a raise: it’s okay to increase your standard of living a little – but bank the rest. For example, if you get a £2,000 raise, take £500 and spend it! But save or invest the remaining £1,500. It’s too easy to think a single raise lets you move up to a totally different financial level in a single step. If you get a raise, be realistic: you earned it, and you should enjoy the results of your hard work. Treat yourself to something nice that you’ve been wanting for a long time, and make it something you’ll remember. After that, however, I strongly encourage you to save and invest as much of it as possible, because once you start getting accustomed to a certain lifestyle, you can never go back. After buying a Mercedes, can you ever drive a Toyota Corolla again?

1 Get your salary, determine what you’ve been spending and figure out what your Conscious Spending Plan should look like (30 minutes). Do this now and don’t overthink it. Just break your take-home income into chunks of fixed costs (50–60%), long-term investments (10%), savings goals (5–10%), and guilt-free spending money (20–35%). How does it fit? 2 Optimise your spending (2 hours). Dig deeper into your savings goals and monthly fixed costs. Try the À La Carte Method. How much does your insurance actually cost – can you improve on that? How much will you spend on Christmas gifts and a vacation this year? Break these expenses down into monthly chunks, then recalculate your plan. 3 Pick your Big Wins (5 hours). Open an account at You Need a Budget. Assuming you want to cut your spending by £200/month, what one or two Big Wins will you target? Start using the envelope system. 4 Maintain your Conscious Spending Plan (1 hour per week). Enter any cash receipts into your system each week. Tweak the percentages you send to each part of your spending plan (we’ll cover this in detail in the next chapter). And most important, make sure your system is realistic enough that you’ll stick with it for the long term.

Michelle gets paid once a month. Her employer automatically deducts 5% of her pay – an amount she set up by talking to her HR department – and puts it in her pension. The rest of Michelle’s salary goes to her current account by direct deposit. (For simplicity, I’m not including taxes here, but you can control how much your employer withholds from your salary each month to pay taxes by looking at your payslip.) About a day later, her Automatic Money Flow begins transferring money out of her current account. Her stocks and shares ISA will pull 5% of her salary for itself. (That combines with the pension contribution to complete the 10% of take-home pay for investing.) One per cent will go to a wedding sub-savings account, 2% to a house deposit sub-savings account and 2% is earmarked for her emergency fund. (That takes care of her monthly savings goals, with a total of 5% of take-home pay going into savings.)

Her system also automatically pays her fixed costs. She’s set it up so that most of her subscriptions and bills are automatically paid by her credit card. Some of her bills can’t be put on credit cards – for example, utilities and loans – so they’re automatically paid out of her current account. Finally, her credit card company automatically emails her a copy of her bill for a 5-minute review. After she’s reviewed it, the bill is also automatically paid in full from her current account. The money that remains in her account is used for guilt-free spending money. She knows that no matter what, she’s already hit her savings and investing goals before she spends a penny of her guilt-free money – so she can truly enjoy buying what she wants. To make sure she doesn’t overspend, she’s focused on two Big Wins: eating out and new clothes. She sets alerts in Money Dashboard to notify her if she goes over her spending goals, and she keeps a reserve of £500 in her current account just in case. (The couple of times she went over her spending, she paid herself back using her “unexpected expenses” money from her savings account.) To track spending more easily, she uses her credit card to pay for all of her fun stuff as often as possible. She knows from her spending trend that she tends to spend £100 a month in cash on coffee and taxis, so she includes that in her guilt-free spending. No tracking receipts or manually entering data. In the middle of the month, Michelle’s calendar reminds ...

AUTOMATING YOUR MONEY: HOW IT WORKS

One thing you want to pay attention to is picking the right dates for your transfers. This is key, but people often overlook it. If you set automatic transfers at weird times, it will inevitably necessitate more work. For example, if your credit card is due on the first of the month, but you don’t get paid until the fifteenth, how does that work? If you don’t synchronise all your bills, you’ll have to pay things at different times and that will require you to reconcile accounts. Which you won’t do. The easiest way to avoid this is to get all your bills on the same schedule. To accomplish this, gather all your bills together, call the companies and ask them to switch your billing dates. Most of these will take five minutes each to do. There may be a couple of months of odd billing as your accounts adjust, but it will smooth itself out after that. If you’re paid on the first of the month, I suggest switching all your bills to arrive on or around that time too. Call and say this: “Hi, I’m currently being billed on the seventeenth of each month, and I’d like to change that to the first of the month. Do I need to do anything besides ask right here on the phone?” (Of course, depending on your situation, you can request any billing date that will be easy for you.)

1st of the month: Part of your salary is automatically sent to your pension. The remainder (your take-home pay) is direct-deposited into your current account. Even though you’re paid on the last day of the month, the money may not show up in your account until the next day, so be sure to account for that. Remember, you’re treating your current account like your email inbox – first, everything goes there, then it’s filtered away to the appropriate place. Note: the first time you set this up, leave a buffer sum of money – I recommend £500 – in your current account just in case a transfer fails. You can “cash out” that buffer after a couple of months. And don’t worry: if something does go wrong, use the negotiation tips on page 85 to get any overdraft fees waived. 5th of the month: Automatic transfer to your savings account. Log in to your savings account and set up an automatic transfer from your current account to your savings account on the fifth of every month. Waiting until the fifth of the month gives you some leeway. If, for some reason, your salary doesn’t show up on the first of the month, you’ll have four days to correct things or cancel that month’s automatic transfer. Don’t just set up the transfer. Remember to set the amount too. (To calculate the amount, use the percentage of your monthly income that you established for savings in your Conscious Spending Plan – typically 5% to 10%.) But if you can’t afford that much right now, don’t worry – just set up an automa...

WHEN THE MONEY FLOWS On this date . . . . . . these actions happen Last day of the month ▪ Your salary is direct-deposited into your checking account 1st of the month ▪ Part of your salary goes into your pension 5th of the month ▪ Automatic transfer from current account to savings account ▪ Automatic transfer from current account to stocks and shares ISA 7th of the month ▪ Automatic payment of bills from current account via direct debit or standing order ▪ Automatic transfer from current account to pay off credit card bill

If you’re paid twice a month: Replicate the above system on the first and the fifteenth – with half the money each time. The key is to make sure you pay your bills on time, which is why it’s important to move your bills’ due dates to the first of the month. Now – to oversimplify it for explanation’s sake – you’ll pay your bills with your first salary instalment of the month, and you’ll fund your savings and investing accounts with your second one. I’ve also got two other options for you to use this system if you’re paid twice a month: ▪ Another way to work your system is to do half the payments with one salary instalment (retirement, fixed costs) and half the payments with the second instalment (savings, guilt-free spending), but that can get clunky. ▪ Save a “buffer” of money, which you can use to simulate getting paid once a month. You’re essentially using a pool of money to pay your bills and contribute to your savings and current account, then getting “paid back” by your salary each month. For example, if your take-home pay is £2,000/month (or £1,000 fortnightly), you could keep £4,000 in your current account and follow my automation system as outlined in this chapter. Why £4,000? Because each month, your automation system will begin transferring money for bills and savings, and you want to build in a little extra in case something goes wrong (such as your salary arriving late). If you can afford to do this, this is a great way to simplify your system and simulate gett...

If you have irregular income: I know lots of freelancers and others who earn £10,000 one month, then nothing for the next two months. How can you deal with spikes in income? Good news: this system will accommodate irregular income with no problem – you just need to take an extra step. Here’s the quick summary of what you’re going to do: in months where you make a lot, you’re going to save and build a buffer for the slow months. Over time, you’ll build enough of a buffer that you can simulate a stable income, letting you use this system as designed. Even in slow months, you can pay yourself from your buffer. Here’s how you do it. First – and this is different from the Conscious Spending Plan – you’ll have to figure out how much you need to survive on each month. This is the bare minimum: rent, utilities, food, loan payments – just the basics. Those are your bare-bones monthly necessities. Take a second to write it down. Now, back to the Conscious Spending Plan. Add a savings goal of three months of bare-bones income before you do any investing. For example, if you need at least £1,500/month to live on, you’ll need to have £4,500 in a savings buffer, which you can use to smooth out months where you don’t generate much income. The buffer should exist as a sub-account in your savings account. To fund it, use money from two places. First, forget about investing while you’re setting up the buffer, and instead take any money you would have invested and send it to your savings acc...

Money exists for a reason – to let you do what you want to do. Yes, it’s true, every pound you spend now would be worth more later. But living only for tomorrow is no way to live. Consider one investment that most people overlook: yourself. Think about travelling – how much will that be worth to you later? Or attending that conference that will expose you to the top people in your field? My friend Paul has a specific “networking budget” that he uses to travel to meet interesting people each year. If you invest in yourself, the potential return is limitless.

Since many freelancers don’t know the rules around self-employed taxation, they can get surprised when tax time comes around. I’ve known a lot of freelancers who were stunned to owe unexpectedly large amounts of tax. As a rule of thumb, you should set aside 30% of your income for taxes. Some people save 20%, but I prefer to be conservative: it’s better to end up oversaving than owing money at the end of the year.

In 2001, Frederic Brochet, a researcher at the University of Bordeaux, ran a study that sent shock waves through the wine industry. Determined to understand how wine drinkers decided which wines they liked, he invited 57 recognised experts to evaluate two wines: one red, one white. After tasting the two wines, the experts described the red wine as “intense”, “deep”, and “spicy” – words commonly used to describe red wines. The white was described in equally standard terms: “lively”, “fresh”, and “floral”. But what none of these experts picked up on was that the two wines were exactly the same wine. Even more damning, the wines were actually both white wine – the “red wine” had been tinted with food colouring. Think about that for a second. Fifty-seven wine experts couldn’t even tell they were drinking two identical wines.

Before we move on to discuss how you can beat the experts, let’s look a little more deeply into how they operate and why their advice so often misses the mark. The most visible financial “experts” are the pundits and portfolio managers (the people who choose the specific stocks in mutual funds). They love to regale us with their predictions about where the market is going. Up! Down! They go on and on about how interest rates and oil production and a butterfly flapping its wings in China will affect the stock market. This forecasting is called “timing the market”. But the truth is they simply cannot predict how high, how low, or even in which direction the market will go. I get emails from people wondering what I think about the energy sector, currency markets, or Google every single day. Who knows about those things? I certainly don’t, especially in the short term. Unfortunately, the fact is that nobody can predict where the market is going. Still, the talking heads on TV make grandiose predictions every day and, whether they’re right or wrong, they’re never held accountable for them.

The media feeds off every little market fluctuation. One day, the pundits spread gloom and doom about a multi-hundred-point loss in the market. Then, three days later, the front page is filled with images of hope and unicorns as the market climbs 500 points. It’s riveting to watch, but step back and ask yourself: “Am I learning anything from this? Or am I just being overwhelmed by information about the market going up one day and down another?” More information is not always good, especially when it’s not actionable and causes you to make errors in your investing. The key takeaway here is to completely ignore any predictions that pundits make. They simply do not know what will happen in the future.

Even though you’d think they’d know better, fund managers also fall prey to financial hype. You can see this in the trading patterns of funds themselves. Mutual funds “turn over” stocks frequently, meaning they buy and sell stocks a lot (incurring trading fees and, if held outside a tax-advantaged account, taxes for you). The managers chase the latest hot stock, confident of their abilities to spot something that millions of others have not. What’s more, they also demand ...

“But, Ramit,” you might say, “my fund is different. The manager returned 80% over the last two years!” That’s great, but just because someone beat the market for a few years doesn’t mean they’ll beat the market the next year. Starting in 2000, S&P Dow Jones Indices did a sixteen-year study and found that the fund managers who beat their benchmarks one year had an extremely difficult time getting similar returns the next year. “If you have an active manager who beats the index one year, the chance is less...

Pundits and the media know exactly how to get our attention: flashy graphics, loud talking heads and bold predictions about the market that almost never come true. These may be entertaining, but let’s look at actual data that will shock you. Putnam Investments studied the performance of the S&P 500 over fifteen years, during which time the annualised return was 7.7%. They noted something amazing – during that fifteen-year period, if you missed the ten best days of investing (the days where the stock market gained the most points), your return would have dropped from 7.7% to 2.96%. And if you missed the best thirty best days, your returns would have dropped to -2.47% – negative returns!. In actual dollar values, if you’d invested $10,000 and kept your money in the market over those fifteen years, you’d end up with $30,711. If you missed the ten best investing days, you’d end up with $15,481. And if you missed the thirty best investing days, you’d end up with $6,873 – less than you began with. This maths is startling. It makes you wonder about the certainty of friends and pundits, who say it’s “obvious” that the market is going down. Ignore them. It may feel good to try to predict where the market is going to go. But candidly, when it comes to investing and compound interest, your feelings will lead you astray. The only long-term solution is to invest regularly, putting as much money as possible into low-cost, diversified funds, even in an economic downturn. This is why long...

If I asked you to name the best stock from 2008 to 2018, you might guess Google, but would you have guessed Domino’s Pizza? Back in January 2008, if you invested $1,000 in Google stock, ten years later it would be worth a little over $3,000. Tripling your money in ten years is fantastic. But if you’d taken that same $1,000 and purchased Domino’s stock, your investment would have gone almost up to $18,000. The problem is that nobody can consistently guess which funds or stocks will outperform, or even match, the market over time. Anyone who claims they can is lying.

How Financial Experts Hide Poor Performance As I’ve shown, the “experts” are often wrong, but even more irritatingly, they know how to cover their tracks so we don’t catch on to their failures. In fact, the financial industry – including both companies that administer mutual funds and so-called experts – are sneakier than you’d imagine. One of the biggest tricks they use is to never admit they were wrong. Daniel Solin, author of The Smartest Investment Book You’ll Ever Read, describes a study that illustrates how financial ratings companies like Morningstar – which provides stock ratings that investors can use to get a quick take on many stocks’ performance – continue to give thumbs-up ratings even as the companies they purport to be evaluating crater and lose billions of dollars of shareholder value. The study found the following: Forty-seven of the fifty [advisory] firms continued to advise investors to buy or hold shares in the companies up to the date the companies filed for bankruptcy. Twelve of the nineteen companies continued to receive “buy” or “hold” ratings on the actual date they filed for bankruptcy. Companies like Morningstar offer ratings of funds that are supposedly simple reflections of their value, but the idea of Morningstar’s five-star ratings is actually complete nonsense. Why? For two reasons: ccc First, receiving five golden stars doesn’t actually predict success. A study by researchers Christopher Blake and Matthew Morey showed that although the low-...

A number of mutual-fund management complexes employ the practice of starting “incubator” funds. A complex may start ten small new equity funds with different in-house managers and wait to see which ones are successful. Suppose after a few years only three funds produce total returns better than the broad-market averages. The complex begins to market those successful funds aggressively, dropping the other seven and burying their records. —BURTON G. MALKIEL, A RANDOM WALK DOWN WALL STREET

Now, there are indeed investors who have beaten the market consistently for years. Warren Buffett, for example, has produced a 20.9% annualised return over fifty-three years. Peter Lynch of Fidelity returned 29% over thirteen years. And Yale’s David Swensen has returned 13.5% over thirty-three years. They have phenomenal investing skills and have earned their titles as some of the best investors in the world. But just because these guys can consistently beat the market doesn’t mean you or I can.

Yes, theoretically, it is possible to consistently beat the market (which typically returns around 8% after you account for inflation), in the same way it is possible for me to become a heavyweight boxing champion.

With millions of people around the globe trying to beat the market, statistically there are bound to be a few extreme outliers. Who knows whether their success is due to statistics or skill? But even the experts themselves agree that individual investors shouldn’t expect to equal their returns. Swensen, for example, has explained that he achieves outsize returns because of top-notch professional resources, but more important, access to investments that you and I will never have – such as the very best venture capital and hedge funds, which he uses to bolster his asset allocation. These professionals spend ...

Financial companies know very well about survivorship bias, but they care more about having a page full of funds with great performance numbers than revealing the whole truth. As a result, they’ve consciously created several ways to test funds quickly and market only the best-performing ones, thus ensuring their reputation as the brand with the “best” funds. These tricks are especially insidious because you’d never know to look out for them. When you see a page full of funds with 15% returns, you naturally assume they’ll keep giving you 15% returns in the future. And it’s even better if they have five-star ratings from a trusted company like Morningstar. But now that we know about survivorship bias and the fact tha...

How to Engineer a Perfect Stock-Picking Record Since we know it’s almost impossible to beat the market over the long term, let’s turn to probability and luck to explain why some funds seem irresistibly compelling. Although a fund manager might be lucky for one, two, or even three years, it’s mathematically unlikely he’ll continue beating the market. To examine probability theory, let’s take a simple example of an unscrupulous scammer who wants to sell his financial services to some naive investors. He emails ten thousand people, telling half that Stock A will go up and telling the other half Stock B will go up. “This is just a freebie email to demonstrate my insider knowledge,” he might say. After a couple of weeks, he notices that Stock A has indeed gone up by chance. He eliminates the Stock B group and focuses on the Stock A group, emailing them an “I told you so” note. This time, he splits the mailing in half again. Twenty-five hundred people are told about Stock C and twenty-five hundred are told about Stock D. If either C or D goes up, on the next cycle, at least 1,250 people will have seen him pick two stocks successfully. And each cycle will make the recipients increasing...

4. Once you have seven figures in assets, or complex transactions involving kids or retirement or taxes, you’ve earned the right to consider advanced advice. Hire a fee-only financial adviser for a few hours or see my website for my advanced course on personal finance.

Mutual funds – which are simply collections of different investments like stocks or bonds – are often considered the simplest and best way for most people to invest. But, as we’ve seen, fund managers fail to beat the market 75% of the time, and it can be hard to tell which funds will actually perform well over the long term. And no matter how good a mutual fund is, the returns are hampered by the large fees they charge. (Sure, there are some low-cost mutual funds, but because of the way they compensate their own portfolio managers and other employees, it’s virtually impossible for them to compete with the low costs of passively managed index funds, which I’ll talk more about in a minute.) When it comes to investing, as discussed, fees are a huge drag on your returns. This is a little counterintuitive, since we’re used to paying for service, like our gym membership or admission to Disneyland. If we’re getting something out of it, we should pay a fair price, right? The key is “fair”, and many of the financial “experts” we turn to for guidance make an effort to squeeze every last penny out of us.

You see, mutual funds use something called “active management”. This means a portfolio manager actively tries to pick the best stocks and give you the best return. Sounds good, right? But even with all the fancy analysts and technology they employ, portfolio managers still make fundamentally human mistakes, like selling too quickly, trading too much and making rash guesses. These fund managers trade frequently so they can show short-term results to their shareholders and prove they’re doing something – anything! – to earn your money. Not only do they usually fail to beat the market, but they charge a fee to do this. Mutual funds typically charge 1% to 2% of assets managed each year. (This percentage is known as a fund’s expense ratio.) In other words, with a 2% expense ratio and a £10,000 portfolio, you’d pay £200 per year in fees. Some funds even tack on additional sales charges, or “loads”, to the purchase price (a front-end load) or sales price (back-end load) of the fund. These are just some of the tricky ways mutual fund managers make money whether they perform or not.

Two per cent doesn’t sound like much until you compare it with the alternative: “passive management”. This is how index funds (a cousin of mutual funds) are run. These funds work by replacing portfolio managers with computers. The computers don’t attempt to find the hottest stock. They simply and methodically pick the same stocks that an index holds – for example, the five hundred stocks in the S&P 500 – in an attempt to match the market. (An index is a way to measure part of the stock market. For example, the NASDAQ index represents certain technology stocks, while the S&P 500 represents five hundred large US stocks. There are international indexes and even retail indexes.) Most index funds stay close to the market (or to the segment of the market they represent). Just as the stock market may fall 10% one year and gain 18% the next year, index funds will rise and fall with the indexes they track. The big difference is in fees. Index funds have lower fees than mutual funds, because there’s no expensive staff to pay. Vanguard’s S&P 500 index fund, for example, has an expense ratio of 0.14%. Remember, there are all kinds of index funds. International funds, healthcare funds, small-cap funds. There are even funds that match the overall US stock market, which means if the market goes down, these index funds will also go down. But over the long term, the overall stock market has consistently returned about 8% after inflation.

There’s a famous quote from self-development legend Jim Rohn, who says: “Don’t wish it was easier, wish you were better. Don’t wish for less problems, wish for more skills.” Don’t wish for someone to hold your hand like you’re a four-year-old skipping rope and chewing bubblegum. Wish to build discipline of long-term investing, like an adult.

Our tendency to conflate “likable” with “trustworthy” is amazing. One great study at the University of Chicago demonstrated this. The title of the study: “US doctors are judged more on bedside manner than effectiveness of care.”

Automatic investing is not some revolutionary technique that I just invented. It’s a simple way of investing in low-cost funds that is recommended by Nobel Laureates, billionaire investors such as Warren Buffett and most academics. It involves spending most of your time choosing how your money will be distributed in your portfolio, then picking the investments (this actually takes the least amount of time) and, finally, automating your regular investments so you can sit and watch TV while growing your money.

The way I described automatic investing was basically the same as saying “puppies are cute”. Nobody would ever disagree with it. Automatic investing sounds perfect, but what happens when the market goes down? It’s not as easy to go along for the ride then. For example, I know several people who had automatic investment plans and when the stock market incurred huge losses in late 2008, they immediately cancelled their investments and took their money out of the market. Big mistake. The test of a real automatic investor is not when things are going up, but when they are going down. For example, in October 2018, the stock market dropped and one of my investment accounts decreased by more than $100,000. I did what I always do – kept investing, automatically, every single month.

As Warren Buffett has said, investors should “be fearful when others are greedy and greedy when others are fearful”.