What to Do About This Scary Stock Market

shockmonsterRecently I’ve been getting a lot more emails that go something like this:

Dear Mr. Money Mustache,

I’m a new reader and I’m interested in improving my money situation. Spending less, earning more and investing. But when I checked out your article on stock investing with Betterment, it looks like a terrible deal. You’ve pumped in $116,000 to that account over the last 16 months and yet the current value is only about 110 grand. You’ve lost almost six thousand dollars!

I think you picked a lemon – I think I’ll either find a financial adviser that can make me more money, or stick with my savings account. Half a percent is a lot better than losing six grand!

While these emails are always a little bit unfortunate (because it means I haven’t done a great job making my investing articles easy to find), I’m actually thankful for the drop in my account value. And the even larger number of dollars I’ve lost in the rest of my retirement savings sitting at Vanguard and other places. It’s not just six thousand dollars that has disappeared from my net worth in the last sixteen months – it’s hundreds of thousands. And yet I feel better about investing than I did at the very peak of the stock market’s lofty heights back in summer 2015. How could this be?

Welcome to Real Investing!

Stock market performance since I started this blog.

Figure 1: Stock market performance (including dividends) since I started this blog. Results from our IndexView tool.

The reason to celebrate is that is a completely normal and healthy part of investing. Stocks have been on an almost uninterrupted climb since I started this blog in 2011, which may have given beginners an unrealistically rosy picture. But now we’re seeing a more natural pattern, and I’m glad. Because this actually means more wealth for all of us. It’s a sale on stocks.

Buying Stuff at Lower Prices is Better

Think of it this way: Suppose you’re just starting out as an egg farmer, and your goal is to build up a nice, profitable business. You want to build up a flock of hens so big that they are eventually producing thousands of eggs per month. Enough to live off for life and retire.

You buy your first 100 hens, and they get right to work. You allow those eggs to hatch so more hens can be born, and you also continue to buy hens from the farm supply store. Suddenly your phone rings and it’s Farmer Joe down the road. “The price of hens has just dropped by 50%! You’ve just lost five grand on those hundred hens you bought last summer!”

Is this a sensible way to think about it?

No, of course not. You’re happy that hens are cheaper, because now you can build your egg business even faster.

Stocks are just like hens. They lay eggs called “dividends”, which are real money that can either flow automatically into your checking account, or automatically reinvest itself to buy still more stocks. Some younger companies don’t pay dividends, but that doesn’t mean they aren’t making you money – they are just reinvesting their profits to grow even faster – and eventually become a Super Hen.

There’s only one time you care if one of your shares is down: on the day you sell it. And as a wise lifetime buyer of only low-fee index funds, this day is sometime well into your retirement, only after you’ve spent your dividend income and drained down any other cash reserves you might have sitting around.

How to See a Dividend in Real Life

If you type the name of any stock or exchange-traded fund into a market analysis website like Google Finance, you’ll see a field called “Yield”. That’s the annual dividend payment you get for owning those shares, as a percentage of your investment. Let’s try it out:

For Vanguard’s  “Everything in the US” fund called VTI, you get this:

This fund is showing a total annual dividend of 2.04% at the time I type this.

Interestingly enough, when I wrote the basic text of this article a month ago, stocks were 10% lower and that yield was thus 10% higher (2.24%) since the dividend rate hasn’t changed even as the price swung around.

Similarly, if you look up the Vanguard “Everything Except the US” ETF with ticker symbol “VXUS”, you get this:
And its current dividend yield is 2.94% – much higher because European/World stocks are currently cheaper than US ones.

If you own shares in either of these funds, actual Dividend Eggs show up in your account every 3 months. You can use them to buy more shares, or to buy edible eggs or other groceries.

Selling Stuff over a Long Period of Time means Smooth Sailing

So you’re a Mustachian and spend your long 10-15 year career living richly on some of your salary, and accumulating loads of index funds with the other 60% of those earnings. Once your investments reach $1 million, you decide to retire, because the 4% rule indicates that should cover your family’s $40,000 annual spending forever.

Given current stock market conditions, a ‘stash like that would provide $25,000 per year in dividends alone. So you need to sell a few shares each year ($15k worth) to make up the difference.

$15k is only 1.5% of your million dollars.

Suppose that during the your first year of retirement, the market goes up by 7%, which is roughly what it does each year if you average it out over long time periods:

Now you have $1.07M, so even after the $15k withdrawal (now only 1.4% of your account!) you’re still up over fifty grand.

Suppose the market goes down by 13%, which is roughly what happened from the highest peak to the lowest point of this supposedly bad year. Despite this fluctuation in the sticker price, you still had the same number of shares (hens), and they continued to lay about $25,000 in annual dividends.

Now you have $918,000 so your $15k withdrawal on the down year puts you down to $903k.  It sounds painful, but your fifteen thousand was still only 1.6% of your balance.

And then the stock market resumes its upward march, which it always does. Some years it goes up 20%, other years it drops by 10%, but overall the continuous stream of dividends (eggs) and growth in company value and productivity (hen size) keep you well fed and happy – forever.

So What Have We Learned?

If you’re still earning money and investing it, these are good times. The more the stock market drops, the happier you should be. Just keep your primary life stable (reasonable spending, no consumer debt, good healthy habits), and pour the rest into those investments (max out the 401(k) first, then IRAs, then put the rest into normal taxable accounts).

How to Invest in Stocks:

You can get great results by knowing only one thing: “Buy a low-fee Index Fund that allows you to own a slice of at least the Entire US Market.”

There are many funds that accomplish this, but my default choice is Vanguard’s VTI. You can buy it by getting a Vanguard account, or from any brokerage account (I have my own VTI shares in a brokerage account with my bank, just because it allows easier transfers to and from the family checking account).

More recently, I switched to dumping extra money into my Betterment account (see ongoing results here). It’s the same idea: you end up buying Vanguard index funds but with a better interface, more sophisticated worldwide allocation and tax loss harvesting that makes it worth several times their 0.15% annual service fee to me. But some pretty thoughtful readers have disagreed with my choice – be sure to read the comments below that article to get their perspective.

This article is obviously just a repetition of the oldest of investing knowledge. But it’s still a lesson that very few people understand today. Please hit your friends, your financial adviser, or the commentators on your television over the head with it if they ever express fear over a falling stock market in the future.

Further Reading:

How Much is Too Much in your 401(k)? explains why you should still put money in tax-deferred accounts even if you’re planning to retire early, because you can get it out early if needed.

The Stock Series by my pal Jim Collins goes through the philosophy of index fund investing at a leisurely pace with plenty of interesting stories and folksy wisdom.


  • Rob February 29, 2016, 5:41 pm

    “Buy when stocks are low” — me

    • Jim Wang March 2, 2016, 10:50 am

      “buy on a regular basis and don’t worry about it” – me :)

      • Justin Colletti March 2, 2016, 1:53 pm

        Does this mean you’re OK with buying stocks when they are very expensive and unlikely to have a good yield over a 10-30 year period?

        It just doesn’t sound very Mustachian to me to buy US stocks when they are overpriced.

        US stocks can be a great long-term value. But how great of a long-term value they are depends greatly on their purchase price.

        It seems wasteful to me to blindly throw resources at already overvalued assets. The CAPE ratio and how it plays into forward expectations for inflation-adjusted returns should play into any conversation about the long-term value of stock indexes, shouldn’t it?

        To take the analogy from this post further: Why buy overpriced chickens when cows are available at a deep discount? Might it be wise to sell some of your chickens when others are paying irrationally high prices for them if you can use the proceeds to buy dairy cows that others are paying irrationally low prices for?

        This is just basic business sense, and I’d suggest, one of the hallmarks of good investing.

        • PaulB March 2, 2016, 3:46 pm

          Justin, you’re absolutely correct that you should not buy stocks when the market is overpriced. The only problem with this logic is that none of us know when that is. When Warren Buffett started his private partnership in the mid-1950s, he did it over the objections of the two men he admired most, his father (a stock broker) and Ben Graham who both told him that it had always been wrong to jump into the market when the Dow Jones was over 300.

          The whole idea of long term dollar cost averaging is that you wind up buying more shares when the market is down without having to figure out just when that is. So skip worrying about CAPE ratios, and forward expectations and keep putting money in every month. Don’t go on line to check how your portfolio did that day, and if you’re really righteous, don’t even open those monthly statements. You no more need to know the exact value of your stock portfolio than you need to know how much your house went up in value today.

          Ben Graham’s The Intelligent Investor has lots of useful information about the mindset a successful investor needs. The most powerful piece of data he has is the calculation of what ,your return would be if you had invested an equal amount of money in the Dow Jones Industrials every month starting in September 1929 when the Dow hit a generational high of 380 and continuing each month for twenty years until 1949 when the Dow was at 180. Now That was a difficult period! Yet due to the power of dollar cost averaging, there was still an internal rate of return of 8%. I imagine that anyone who tried this may well have not been in a position to put money into their account in 1932-33 when prices were at their very lowest, but this is an extraordinarily powerful lesson for us all.

          • Matt March 28, 2016, 11:04 pm

            I consider myself quite knowledgeable of investing and am familiar with cost averaging, but was unaware of that specific data you quoted. Thank you, that’s really interesting to see just how effective it is and might just help me convince my family members to finally follow suit with me on this stuff.

        • Jazzdelaney March 2, 2016, 5:03 pm

          As MMM points out, the intrinsic value of indexed stocks is in the dividends, not the “market price”. Attempts to determine whether any asset is under or overvalued rely on a solid underlying metric-set that can establish the forward value of ALL ASSETS.

          While the CAPE MIGHT be a good historical predictor of future returns, you must also have an accurate mechanism for predicting forward returns of competing asset classes.

          In other words, hens may appear overpriced compared to cows, but if the milk prices crash next year, suddenly those “cheap” cows can’t pay the bills. Without understanding the future prices of eggs AND milk, assessing the intrinsic value of cows and hens is just a guessing game.

          I’m gonna skip the guessing, dollar cost average into diversified low cost indexes and let compounding interest do the work for me!

        • Damo March 2, 2016, 10:57 pm

          That all sounds quite sensible, in theory, Justin. The trouble is, people get it WRONG.

          It’s very difficult (near impossible) to time the market correctly. See the following article:


          • Justin Colletti March 3, 2016, 3:46 pm

            Jazzdelaney: The dividend payout and “intrinsic value” of any stock is essentially a function of the purchase price of that stock compared to its fundamentals. (Earnings, book value of assets, amount of dividend etc.,)

            If you are buying equities when they are overvalued, you are locking in a lower dividend payout compared to when you purchase at fair prices.

            Dami: Nowhere did I mention anything about “timing”! I’m talking about taking a quantifiable look at the intrinsic value of the asset.

            “Market timing” suggests you’re waiting around for mass psychology to change. That’s not what I’m talking about. I’m talking about buying assets at fair prices and not buying them when they are overpriced compared to their intrinsic value.

            Sure, those things do tend to change when mass psychology changes, but not always. We’re not talking about “timing” here. We’re talking about “not buying things at unreasonably high prices.”

            There’s always some asset class on sale somewhere. And there is no need to spend your life waiting around if you prefer to keep on purchasing reliable, interest-bearing assets with a reasonable margin of safety. There are great asset classes other than US equities, and some of them may be fairly valued when U.S. equities aren’t.

            • Megan March 5, 2016, 9:15 am

              This dead horse has been so thoroughly beaten in the MMM forums I don’t think there is any reason to rehash it here in the comments section.

            • ArmyDoc March 6, 2016, 5:52 am

              I think this is a case where the logical thinking doesn’t match the evidence. Please do read the article that @Damo linked to. The way most of us use the term “market timing” is exactly the way @Damo uses it which is the same way you do – trying to figure out if a class is overpriced and waiting until the price drops.
              It also comes down to the work – someone (maybe you, maybe the hundreds of people whose entire job and corporate resources are devoted to this) will be able to find the other “undervalued asset class” and correctly buy it to outperform the no-load low cost index funds — but most of us will not find that class. And most of us don’t have fun trying to find the overlooked undervalued asset class – so the cost of our time is not worth the very small gain to potentially beat the very easy-peasy jump into investing in no-load low-cost index funds. Just sayin’….

            • Justin Colletti March 7, 2016, 8:02 am

              Sorry Megan but this horse is alive and kicking.

              It continues to be true that if you purchase assets at above-average values for that asset class, you will tend to have below-average returns for that asset class.

              And, if you buy an asset class when it is significantly overpriced, you will have long-term returns that are significantly below average.

              ArmyDoc, this is a reality that is easily confirmed by empirical evidence—not just by reason.

              I understand what you are saying about the opportunity cost of research. You are right to suggest that we all ought to have a threshold where we recognize that further research will be too much work for too little reward, when compared to our other options.

              But with that said, finding international stock markets that are reasonably valued just isn’t that hard or time consuming! Here’s a list of all the major markets along with their dividend yields, P/E and CAPE ratios. You’re done:


              It’s also very easy to look up inflation-adjusted prices for all major commodities and see whether or not they are trading at historic lows.

              The laziest among us can do this quite easily, and applying this very minuscule amount of effort is likely a brighter idea than continuing to pile into an overvalued asset class that will likely have very poor, below-average returns until it comes down to a more reasonable price level again in the near future.

              I just don’t get it: A Mustachian wouldn’t buy an overpriced house or car. So why would a Mustachian want to buy an overpriced asset?

              It is, in my view, thoughtless and wasteful to do so.

          • Dave March 6, 2016, 11:40 pm

            If you see the market down more than 1% in a day add some. If it’s up more than 1% trim some of your big winners.

        • Nick March 8, 2016, 8:41 am

          I’m actually surprised MMM didn’t mention anything about alternative investments in this article. As you mentioned, stocks CAN get overpriced and if you have your whole nest egg in stocks, you should be able to sleep at night. Raise some cash and let it earn $$ somewhere else like Lending Club (MMM recommendation in the past). Funding consumer loans. You can fund only grade A&B loans and still make 4.5-6.5% annually. That’s pretty solid.

          • Justin Colletti March 9, 2016, 9:14 pm

            Definitely a good idea to diversify a bit, but I would warn that consumer loans are fairly closely correlated to stocks.

            Meaning, when stocks crash, that’s exactly the time that consumers tend to start to default quite a bit. So they tend to go down and stay down together.

            If you’re interested in truly diversifying in ways that will help your real returns, then you want to be diversifying into things that *don’t* correlate closely with stocks.

            And, I’d add that you’d be wise as well to buy less of those things when they are expensive, and more of them when they are cheap.

            This does not require intense effort. It only requires taking a serious look at current reality from time to time.

            Once a quarter, or even once a year would probably be okay for the average passive investor once you understand what to look for.

        • JB March 9, 2016, 12:48 pm

          You don’t know when stocks are expensive. Where they expensive when Dow was 3,000 or 10,000? The market goes up over time. Buy now and the market could be 100,000 in 10 years.

          • Justin Colletti March 9, 2016, 8:42 pm

            Of course you can know when stocks are expensive. You can look at their price compared to their earnings. You can look at their price compared to their dividend yield. You can look at their price compared to their assets, or “book value”.

            This is very basic stuff. The idea that a person can’t tell when stocks are overvalued is simply absurd. If you really believe that, it only means you don’t yet really understand how stocks are valued, and would probably be wise to learn the basics before you consider going and putting all of your money into them.

            It’s also important not to confuse an increase in dollar prices with an increase in actual value. Once you adjust for inflation, you’ll find that stocks are actually priced *lower* in real dollars today than they were in 1999 and 2000:


            This means that the market (excluding the incredibly small amount of dividends you would have earned from buying at those inflated prices) has still not yet recovered in real terms from that bubble.

            Based on the CAPE ratio, US stock indexes are currently overvalued by about 40%:


            It was even worse just before this little teaser of a mini-correction in Jan/Feb ’16.

            You could also pick other metrics that would show the same issues. Based on earnings yield, US stock indexes are overvalued by close to 40% as well:


            Price to book values are also far above their pre-bubble-era norms.

            C’mon. This is not rocket science.

            When you’re buying stocks, you’re buying the earnings, assets, and likely future earnings and assets of a company. That’s it. That’s all there is.

            Simply put, the more stocks cost compared to their earnings and assets, the more expensive they are. And when it comes to indexes, the further above the average *real* price you purchase at, the further below average your real returns will tend to be.

            It’s really not that complicated—especially if we’re talking straight index investing: All other things being equal, if you pay more for earnings and retained assets, you get lower yields than if you pay less for them. You can look at historic averages for these figures to see where we are in the business cycle for stocks.

            Duh. This is stock investing 101. At least it should be. Unfortunately, what the financial media tries to teach us is “buy buy buy buy, no matter the price, no price is too high!”

            Do you ever stop and wonder why? Like, perhaps they have a vested interest in that kind of irrational nonsense?

            Mustachians should be ashamed for falling for it. That’s the bottom line for me.

            • Jazzdelaney March 11, 2016, 12:00 pm

              Justin, I’m concerned that you are trolling us.

              Admittedly an intelligent, articulate and persuasive troll, but a troll nonetheless.

              On the off-chance that you legitimately believe what you are saying – that you can accurately predict the over or undervaluation of asset classes using readily available P/E ratio tools, I have 2 questions and an offer:

              Question 1. With easy access to the “infallible” P/E ratios for so many diversified asset classes – why do 97% of professional money managers fail to outperform the underlying indexes even before costs & fees? If a simple review of P/E ratios is all that’s required to identify undervalued assets, is it not reasonable to expect that the vast majority of professional, for-profit entities engaged in the business of market analysis would quickly and easily outperform the market average?

              Question 2: Your belief in this strategy clearly runs deep and true, so I must conclude that you have experience with it in your own portfolio. What kind of success have you experienced? I imagine that an individual who can accurately predict undervalued assets in the open market must have leveraged that knowledge into a substantial portfolio! Congrats, I’d love to hear the details of your success!

              Finally, I offer you this interesting article: https://finance.yahoo.com/news/wells-fargo-debunk-price-earnings-ratio-pe-not-return-average-value-224322906.html
              TLDR; P/E ratios are chaotic, non-stationary and non-mean reverting – which means that assets can (& have) appeared over or undervalued while subsequently over or under performing to their P/E predicted expectation. The very metric that you are basing your whole market analysis on is quantifiably unreliable.

              Now, are you trolling or not? Let’s see…..

            • Justin Colletti March 12, 2016, 7:23 am

              Hi Jazzdelaney. To be honest I’m not certain I know what “trolling” means, since it’s used in so many different ways. But if you’re asking whether I’m being sincere, then yes, absolutely.

              Our friend JB here even inspired a more detailed post about this on my own blog:


              Happy to try and answer your questions:

              1. I never said that the P/E ratio is an “infallible” predictor. Just that long-term P/E is representative of how highly stocks are priced compared to their earnings, and that long-term P/E has significant predictive power over likely future returns.

              What I mean by “long term” PE is the “cyclically adjusted” P/E ratio, also known as the “Shiller PE” or CAPE” ratio. It is an average of the P/E ratio over the past 10 years. This is what is extremely predictive of future returns—not any single snapshot of P/E during any single moment. That number will tend to change from day to day.

              If you are interested in an exhaustive study of this data, and of its well-documented predictive power over long-term future returns, I’d highly recommend the book “Irrational Exuberance” by Nobel-Prize winning economist Robert Shiller. This is the exact topic he won his Nobel for, and it does hold up to scrutiny.

              Of course, the problem is that when assets become overvalued, they may stay overvalued for some time before the market “wakes up” to this fact. Once this happens, the market for that asset tends to swing hard the other way, overshooting fair valuation and going into undervalued territory for some time.

              As to why most money managers can’t beat the market? The answer is obvious: Most of them don’t know what they’re doing, most of them follow the herd, and most of them do extremely stupid things like buy stocks when their CAPE ratio is unreasonably high, and avoid beaten-down assets when they are unpopular and undervalued!

              Fund managers often do what the common wisdom dictates, and go with the trend rather than applying reason or having the guts or brains to buy undervalued assets when they are down and sell overvalued assets when they are up.

              This is especially true of the mutual fund industry, and is also true of the hedge fund industry, though to a slightly lesser extent. And that’s is why an even greater percentage of mutual funds underperform than do hedge funds.

              Of course, as the hedge fund industry becomes more and more saturated with trend-following copycat funds, you find a greater and greater percentage underperform. This is to be rationally expected. But if you break things down by strategy, you will find that certain strategies perform better than others, not just year after year, but generation after generation.

              Although there is a grain of truth in the link you posted, it offers more errors than enlightenment.

              First: As mentioned, yes, it is true that the long-term PE ratio does not “revert to the mean” immediately after overvaluation. It tends to revert right through it, down into undervalued territory, before moving back up through average territory and then overvaluation again over many years.

              The author’s second error is to look at the current, short-term PE ratio—which is extremely volatile—rather than the “CAPE” or “cyclically adjusted” PE ratio, which is much more stable and much more predictive of future returns.

              Long story short: Could stocks stay overvalued for a long time? Yes. Will that just mean that they will go into severely undervalued territory for a long time? Probably. That seems to be what happens every time.

              Reversion to the mean is a very real thing. But of course, nothing moves in a straight line. Mean reversion can take a very tumultuous path, and markets rarely persist at the average for long.

              For more on this you can read my recent post on this:


              But perhaps better yet that you read “Irrational Exuberance” if you really have not encountered these ideas in the past:


              Long story short: A Mustachian would not buy a 2x overpriced car. Why would one buy an overpriced stock?

              When you are buying a stock you are buying two things: A claim on future earnings and retained assets. That’s it. And all other things being equal, if you pay more for earnings and retained assets, then you tend get lower yields than if you pay less for them.

              Right now, stocks are priced very high by any reasonable valuation. You might have no need to sell them if you bought them for fair prices and plan on holding them for many years. But one would be foolish, in my opinion, to be a buyer of them right now. The record of history is just too clear to warrant that.

            • Justin Colletti March 12, 2016, 7:50 am

              Ah, apologies, just realized I neglected to answer your question. Yes, my portfolio is doing quite well, thank you!

              I don’t like to brag about my own returns, but I do study the strategies of people who actually do beat the market reliably month after month, year after year, and have similar results. Why would that be surprising?

              There’s a great joke about efficient markets I’ve always liked:

              “A professor and an investor are walking down the street when the investor sees a $20 bill and stoops down to pick it up. The professor says “Don’t bother. If it were really there, someone would have picked it up already.'”

              While the Efficient Markets hypothesis is definitely correct to some degree, there are limits to it. And at its best, it is only true from the macro perspective. The macro efficiency of markets comes from real people responding to real inefficiencies on a more micro level.

              To complicate the the theory more, arguably, we don’t even really have much of a true “market” in finance in the US. It is one of the more centrally-planned parts of our economy, and it is subject to quite a good deal of herd mentality and groupthink.

              Accordingly, there are a lot more $20 bills on the floor than there should be. But the herd mentality encouraged by both governments and financial media tend to prevent people from seeing them.

              Even if we really did have a very free and efficient market in finance, there would still be reasonable ways to do better than the market. The swings just wouldn’t be quite so wild, because the prevailing interest rates would adapt fairly swiftly and naturally to market demands. But that’s another conversation for another day!

            • Sarah May 2, 2016, 8:26 pm

              Thanks for your comments, Justin. Two years ago, I inherited more money than I’ve ever seen before (100k), and I have been scared to buy into Vanguard out of fear that this is a bad time to buy. I’m going to look into perhaps buying some other assets as well. The problem, though, is that all this research takes so much time (doled out in small segments in the little free time I have), so that’s even longer that my money will sit in the bank earning very little. :/

            • Rudiger September 20, 2017, 8:50 pm

              I hope you eventually decided to invest, Sarah.

              The S&P 500 is up 25%, including dividends, since May 2016.

        • MrFrugalChicago March 12, 2016, 11:21 am

          What you are suggesting is called timing the markets. Many studies prove that we suck at timing the market.

          Put up a steady stock investment every month. Don’t touch it. Some months you will buy low. Some you will buy high. But by removing emotion, you will overall make the right choice. And studies show you will outperform the guys that spend an hour a day worrying about it.

          This is like the hallmark of moustaches. You can do nothing and end up better than people who do something. And have less stress and more money at the end of the day.

          • Justin Colletti March 12, 2016, 8:52 pm

            Again, what we are talking about here is not “timing”, which suggests that you are trying to wait for a tilt in mass psychology or for the Federal Reserve to make a certain move.

            All that is being discussed here is buying stocks when they are at fair and low prices, and buying other things when they are overpriced.

            I’m not even suggesting that anyone sell stocks bought at low prices when they reach overvalued territory. I’m just saying that you’d be foolish to buy stocks when they are obviously overpriced, which should be pretty damn obvious by this point.

            That is a very, very different idea than market “timing”. Warren Buffet, for instance, relies heavily on this exact technique, holding tremendous cash reserves when stock prices are unreasonably high. And yet, he speaks out against the idea of market “timing” whenever he can.

            That is because these two things are two very different concepts.

            It is true, for instance, that Buffet recommends that the average passive investor simply buy and hold index funds. But he also spends much of his time advocating against buying overpriced stocks. So obviously, these two ideas are not mutually exclusive.

            “Nuance”, people. It works.

            • Phil March 4, 2018, 7:25 pm

              Great information. This is exactly why Graham and Buffet and other value investers were so successful. You mention using the P/E ratio. Is not the PEG ratio better as it looks at future growth? What do you think of the Zack’s rating system. 1=strong buy and A for value in a stock purchase? Thank you for your insightful replies.

        • Qmavam March 14, 2016, 11:14 am

          >Does this mean you’re OK with buying stocks when they are very expensive and unlikely to have a good yield over a 10-30 year period?

          I’ll bet my 20/20 hindsight is just as good as yours!

          • Justin Colletti March 16, 2016, 5:37 pm

            Qmnavam: It doesn’t take 20/20 hindsight to avoid buying stocks when they are expensive by any reasonable metric.

            I wasn’t a buyer right before the last crisis either, and I also called the 1999 tech bubble as well. (Although sadly, I was a bit too young to have much in the way of assets way back then.)

            Almost everyone who takes a reasoned, value-based approach was able to do this. Unfortunately, we’re a fairly small portion of the investing public, but we shouldn’t be.

            When you’re buying stocks, you’re buying a share of a company’s earnings and assets. That’s it. When you’re paying 2x-5x the normal price for those things, you’re going to have crappy returns.

            When you take the cyclically adjusted value of the market in aggregate It happens every time. We should be used to this by now. It’s really not that complicated.

        • Rich v March 14, 2016, 1:48 pm

          Thanks for challenging the status quo, Justin. After the stock market crash of 2001-2003, I started to read more about finances. It seems the bulk of the investment providers want to convince us that nobody can time the market in any way to take advantage of it. Most of the market gains are made in only a few days during the year! You don’t want to be out of the market during those times, do you?!? They never bother to mention that most of the losses happen in just a few days during each year as well.

          My best advice is to read Ben Stein’s book, Yes You Can Time the Market. In essence, use one of his simple indicators to know when the market is cheap vs overpriced. In months when it is underpriced, put in double the normal dollar cost average amount. In months when it is overpriced, stockpile that money in cash or some other safe, liquid investment (hard to find with today’s artificially low interest rates).

          The indicators really are simple. The best is a 15-year moving average of the S&P500 Index, adjusted for inflation. Over longer periods, you can beat a regular dollar-cost-averager by up to 50%. I was able to avoid buying anywhere near the peak of 2007, and with the money I didn’t invest then, I plowed into the market in late 2008 through 2010. It really does work. The money I’ve put in stays there. The new money I have generated for investing is piling up in cash again, waiting for the next opportunity.

          • Justin Colletti March 16, 2016, 5:45 pm

            Thanks Richv. Personally, I wouldn’t call that “market timing”. Just “buying low and selling high”, or “understanding the basics of how stock market valuations work.”

            We know there is such a thing as stock indexes being “undervalued— like when the aggregate P/E ratios are well down in single digits and book values are around 1:1: all through the market and dividend yields are higher than bond yields and they’ve dropped down in price and have been down.

            I bet every Mustachian reading this will immediately recognize that this is a perfect time to buy stocks: When others are fearful. Why then, would a Mustachian fail to recognize that stocks can easily be *overpriced* as well?

            I mean, they’ll put in hours of time and research to figure out how to save on gas mileage and heating and contracting costs….. But they won’t spend a few hours learning how stocks are valued to help safeguard and save money on their entire nest egg? The nest egg that is supposed to keep them and their families fed through their long retirement??

            That is simply crazy. Not to mention, wildly inconsistent in principle.

            • Matt April 27, 2016, 2:07 am

              I love the way you think Justin:) I have used this same line of reasoning since I started investing a few years ago and have been doing really well, though I have been buying hated markets and holding them until they recover. It is interesting that people would see this as trying to “time the market”.

              If you look at a 20 year chart in oil, for example, and see that we were recently at prices that haven’t been seen in 14 years, would such an opportunity not warrant a % of one’s portfolio, diversified across different stocks in that market?

              I would like to think it would. I applied this same logic to gold and literally made 600% on a $2000 JNUG position, though holding a safer asset such as GDX or GDXJ would have resulted in 100% gains in a couple months.

              As a wise man once said, you make the most money when an asset goes from bad to less bad.

            • Willem April 28, 2016, 2:49 am

              I agree with your thinking, but using JNUG is not a good example of this at all. JNUG is a VERY speculative instrument, for the following reasons:
              – It follows the price of Junior Gold miners, which are the most speculative among the gold miners, which are speculative investments by itself
              – It follows the price of an already volatile market TIMES THREE
              – The market capitalization of this etf is relatively low, it can be influenced by big parties stepping in an out, even delisted because of this (yes this happened already with other etfs)

              So, yes you are probably right that buying low and selling high is not always equal to trying to time the market, but instruments like JNUG are speculation in its purest form and should not be used as an example of this.

            • Justin Colletti May 2, 2016, 9:52 am

              So great to hear some voices of reason here ,Matt and Willem!

              I’d agree with you both: Buying beat up and undervalued sectors that cannot feasibly stay beat up and undervalued forever (such as stocks or mining are now) is always wise—just as it is wise to buy US equities when they are trading at a significant discount.

              I’d agree with Matt that leveraged positions are a bit too risky for my blood, personally. They need to be watched very closely, which I’m not a fan of, but for someone who both knows and follows the market very well, they can be used with reason and judiciousness.

              The downside risk on them can be quite high if you’re buying at anything other than a clear bottom. But if you are buying at or near a clear bottom, then yes, you have very little downside risk and tremendous upside. Still, probably not something to bet the farm on if you’re a conservative investor with diverse interests outside of investing.

              Anyway, long story short: Yeah, buy things when they’re clearly undervalued, and don’t buy them when they’re clearly overvalued. This isn’t exactly rocket science! :)

        • Greg January 9, 2017, 3:30 pm

          Dow Jones Index when Justin posted this: 16899
          Dow Jones Index this morning: 19877

          Fucken whoops!

          • Jesse January 15, 2018, 1:54 pm

            And a year later… 25,803

      • Frugal Bazooka March 7, 2016, 11:35 am

        This philosophy has never let me down yet

    • kay June 1, 2016, 4:30 pm

      I’m curious what people think about this article from Vanguard saying that financial advisors “may” give investors an extra 3% edge. http://www.vanguard.com/pdf/ISGQVAA.pdf
      I’m considering moving my investments out of a managed situation (Russell, fees of 2.05%) and doing it myself MMM style. I’m older than the usual demographic though, so started this game late, and so don’t have the same margin for self error that a 30 year-old does. Thoughts?
      MMM, if you are interested, I’m willing to be an “old” test subject. I think your blog is awesome, and I so wish I’d seen it sooner, even a year, more, but here we are.

      • --Michael Sheldon June 1, 2016, 11:10 pm

        That article is not claiming to give you an additional 3% return over a broad market index fund with sensible asset allocation. It is comparing their investment sstrategies against a “typical” high fee mutual fund with investment strategies that give a higher risk of emotionally driven investment decisions from “typical” clients.

        Their strategies are listed in Figure 1, which are the common good advice you will find here and on bogleheads: invest in the market through low cost index funds, at your asset allocation, with periodic rebalancing, a nod to tax efficient placement, and stick to the plan.

        Calling that “alpha” is a marketing stretch. They are also advertising to financial a advisors: take a look at figure 5 – this is the advisor’s income graph by charging an assets under management fee to recover up front costs. This all comes out of your returns!

        Don’t be typical. Use their Figure 1 as a guide of topics to research on bogleheads and, in the spirit of this web site: DIY.

  • dathan February 29, 2016, 6:02 pm

    While I agree with everything you are saying, and I am glad I am still “buying” these stocks at these prices, I sure would be bummed if I just retired this year.

    You admit that you retired in 2011, and the market has gone up a good bit since. That has a huge affect on how much easier it is to handle these down times. Regardless of the fact that the market does this, and you shouldn’t be scared by it, you have to also take into account that there is some luck involved in the year you decide to retire.

    If the market goes up for 5 straight years after your ‘retire’ date, I’d say you are in pretty great shape. Now, if the opposite happens and it goes down the first 5 years, well you will likely have to make some income during those years, so that you can take advantage of the cheap stocks.

    Just my 2 cents, but overall, I do agree, this isn’t out of the norm, and I’m ok getting my money in right now.

    • Mr. Money Mustache February 29, 2016, 6:28 pm

      Hi Dathan,

      You’re right that the stock market’s movements right after you retire are important predictors of long-term portfolio survival. But the 4% rule already takes this into account, and it is designed to survive much worse things than what happened this year. [Note that the rule is based on US historical stock performance, might have failed if you had, say, a Japan-only portfolio starting in the 1980s.]

      You certainly don’t need the market to go up for the first 5 years, but if it did, you’d be set up for closer to a 7% safe withdrawal rate!

      My friend the Mad Fientist has a nice post on this: http://www.madfientist.com/safe-withdrawal-rate/

      Also, I retired in 2005 rather than 2011, but I haven’t been drawing on investment income in the last few years due to the good fortune of increasing post-retirement income for both Mrs. MM and myself.

      • Martin February 29, 2016, 6:54 pm

        Hi mr money mustache!

        Long time reader and advocate for your brand of lifestyle and philosophy ( to the displeasure of many people unfortunately).

        I’d like to ask your opinion on investing in the Vanguard s&p 500 as a non american ie the Vanguard ETF. It is pretty much identical to the Vanguard package with a major difference being a difference in price. The fee’s associated with Vanguard for americans is at 0.15% while the vanguard etf is at 0.30%.

        This difference taken into account do you still think its a good efficient way to invest funds long term?

        Thank you so much for all you do

        • Bobby Dazzler March 1, 2016, 6:04 pm

          Hey Martin, that sounds expensive. I’m a Brit living in Asia and buy off ETF’s off the London Stock Exchange using a brokerage. Also look at iShares as they’re quite competitive. Their S&P 500 tracker costs just 0.07%. For the Vanguard FTSE 100 is 0.10%. Some of the total World stock market indexes are a bit more expensive at around 0.25%

          • Martin March 2, 2016, 6:30 pm

            Hi Bobby,

            The reason I’m relegated to this option is

            1) I’m not a US or British citizen so some restrictions apply as to what kind of packages I’m allowed to invest in. The aforementioned high rate is the vanguard S&P 500 equivalent available to non US/Britons.

            2) Lack of Knowledge of other avenues of investing. If I can find an avenue of investing similar to that of the Vanguard package espoused here I would be very partial to it. You mentioned dealing with a broker? All brokerage fee’s and expense ratio of the etf considered what is the aggregate annual expense ratio? Is it still competitive with Vanguard?

            Also where do you live in asia?

            • Qmavam March 14, 2016, 11:46 am

              Be aware the S&P gives you a good exposure to worldwide markets, not just the US. Many of those 500 companies have profits earned oveseas. This is neither good or bad, it just depends on what you want.

      • Jackson March 1, 2016, 7:36 am

        If you are in your 20 and 30s or even early 40s and have a long timeline , staying the course with stocks (I’m a fan of stock funds over individual stocks ) as well as a mix of more conservative investments wil pay off. ..historically.

        But there is a huge CAVEAT against being over-invested in equities if you are in your 50s and 60s. Financial planners who specialize in retirement often mention this fact: : there have been periods of time when we’ve been in a 10 year slump of low returns. It happens, No one can predict -with absolute certainty- when those years will occur.

        The safe withdrawal rate in retirement has historically been 4% on assets. However, recent research by financial researchers who focus in retirement, including Wade Pfau and Michael Kitces ( tney are easily Googled) indicate that we may be currently heading into years of historically low returns.

        So what happens if the stock market returns stink or remain flat for years , returns are as low as 2-3 percent and you need a 4% draw (even after cutting your budget to the bone)?

        The NY Times recently had an article on this: ” Some New Math the 4% Rule. “If my link doesn’t work, just Google the title . It is worth reading for investors of ALL ages. http://www.nytimes.com/2015/05/09/your-money/some-new-math-for-the-4-percent-retirement-rule.html?_r=0

        If you are a young saver and investor, this is no big deal. Time will even things out. But if you’re older (raising hand) you need to have a game plan for adjusting your draw rate in retirement -IF returns are low. If you don’t have a plan for adjusting draw rates based on returns, something called Sequence of Returns can greatly raise the risk that you’ll outlive your savings. I’m simplifying this but the bottom line:
        if returns suck for the first 10 years of retirement but draw rare remains as high as 4%, the risk of running out of money in retirement is much higher.

        Here’s our game plan for riding out low return years as we head retirement:

        1.Have a year’s worth of living expenses saved – in addition to our emergency fund. We’re actually aiming for 2 years of living expenses but at least we have a start . The reasoning: if our other assets, especially equities take a major hit , oir savings ” buy time” to ride things out and we don’t take a draw on low return equities and other assets. We don’t have to panic or rush to sell equities. We know highs and lows are normal.

        2. We don’t assume expenses will be lower in retirement – even for the most frugal. . If longevity runs in your family the odds are high that you will need medical assistance at some point (home health care, nursing home, whatever) . Medicare will NOT cover this… beyond a very small,number of days. . So plan for this. Be ready to self insure for these high expenses (modest semi-private rooms and board in nursing homes are about $90k a year). Do you really want to count on your kids to risk their financial security and cut their work hours to care for you?

        3. Know your rock bottom budget for necessary living expenses and plan to save enough so that a 3%
        draw on your savings will cover your budget in retirement. Factor in inflation. If you’re heading into retirement, try living in your retirement budget NOW.

        As we head into our retirement years, we look back to our 20s and 30s and wish we could go,back and tweak our plan. We did some things right and some wrong. Based in that I would urge reader hereplease google and read about Sequence of Returns and how investment returns and draw rates in the first 10 years of retirement can be “make it or break it” when it comes to

        When it comes to investing, I am a HUGE fan of putting savings on automatic pilot, especially if you can max out a pre-tax plan which has an employer match . We put ours in a mix of low risk and equity investments and never looked back.

        we didn’t assume we had “more” money to spend because we never saw it and it worked as an automatic check in our spending. because we never saw it. If we had it to do over, we’d have increased the contributions even more. We could have done it but we thought we needed more for discretionary and other spending.

        t plan with a. EAt this point we are trying to live on our retirement budget NOW and that has been an eye opener
        1. Save as much as possible, think deeply about how many impulse purchases you really will love in a month or two, etc
        2. Pay attention to how ( remain

        • Jackson March 1, 2016, 7:54 am

          Is there an edit button for posts? Because wow…would I go back and edit the one I just posted! Sorry for the length and grammatical errors.

        • GU March 1, 2016, 11:21 am

          A further insurance policy against retirement homes and the like is strength training. A great many “downward spirals of elderliness” occur due to muscular (and bone) weakness. While you cannot prevent your inevitable decline, you can do a hell of a lot to stop it using simple strength training a few days a week.

          See here for more info: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=3&ved=0ahUKEwi_24_OjKDLAhXEm4MKHXWaCR0QFggpMAI&url=http%3A%2F%2Fstartingstrength.com%2Farticles%2Fbarbell_medicine_sullivan.pdf&usg=AFQjCNFB41WXaSaYgguvoElHJxd8qOKTZA

        • Jonathan March 1, 2016, 11:46 am

          If you own solid individual stocks that pay a good dividend, you don’t have to worry about ‘”withdrawals”. Provided your stocks all continue to pay, you can just take your dividends and not worry about the nominal price of the stock.

          That’s the theory, anyway. You still have to know what you’re doing. I keep 5 years living expenses in cash equivalents, just in case.

          • TheRhino March 5, 2016, 8:02 am


            To do that you need enough capital so that all of your income requirements can be met through dividends. And the dividends need to be both sustainable and growing over time. Few people will have this amount of capital – so for them the value of their shares matters.

        • Eric March 1, 2016, 12:28 pm

          Keep in mind the 4% rule would have survived the worst possible times of investing in the last 100 years. That includes retiring exactly before the great depression, the crash in the 80’s, and every other “the sky is falling” moment in that time frame. 4% is already very conservative. MMM actually already wrote a post on this very subject (http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/). They’ve run the numbers on the last two crashes in 2000 and 2008, and even those who retired at the exact worst times are still doing quite well (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/). Now, the 4% rule only takes into account a 30 year timeline, but for any timeline longer than that you typically have some wiggle room, be it social security, ability to work a bit here and there, ability to cut expenses, etc etc.

          • Mike S. March 2, 2016, 9:38 am

            I think it’s more correct that: “the 4% rule would have survived MOST of the worst possible times”.

            I think that Pfau and Kitces seem to suggest that if you have lost half of your portfolio in the first decade, you are likely in the small percentage of portfolios that don’t survive 30 years.

            I think that the benefits of retiring early are:
            (1) you know how to cut expenses and be flexible (you’ll see the issue and adapt)
            (2) you’ll be young enough to work again if you need to
            (3) you probably didn’t really stop working. Bringing in even $10k/year (of the $40k MMM talks about above) would bring you down to a 3% withdrawal rate.

            • ChaseJuggler March 4, 2016, 9:34 am

              This is one huge advantage that teachers have. Say I retire early and my net worth drops after 6 years. In about a week I could go back to work for a single year at the exact same pay level!

              Our salaries kind of suck, but the ridiculous job security helps to make it easier to pull the trigger when we finally do hit our magic number.

      • Caine March 1, 2016, 8:17 am

        Stocks might certainly continue their climb, but there’s less reason for me to believe so these days. I moved from investing in mutual funds to investing in individual stocks years back because I thought many stocks had very poor fundamentals (PE, price/sales, debt/equity, etc). These days, even using my stock screeners, fundamentals are so poor, it’s hard to find any stocks that meet even my most minimum standards of the past. If I can’t find individual stocks worth their salt, why would I invest in the market as a whole? I can tell you, the ONLY reason I would, is that the FED continues to play bailout and prop up.

      • Dathan March 1, 2016, 11:55 am

        good point about the 4% rule, and thanks for that link I’ll check it out.

        I have thought about taking a gamble and using the 5% rule, again, if my portfolio goes up the first couple years, I’d be fine. And if not, I would just do part time work, so that I could avoid withdrawing during the first couple years.

        • Jackson March 1, 2016, 12:32 pm

          Counting on part-time work in retirement could be a gamble. If you’re in great health, might get a workable plan but as you get older the risk of health issues increases. Also, the vast majority of,people don’t wait till 70 to get Social Security even though there is a significant gain in benefits for waiting.

          My hunch? Tney eother can’t afford to wait !(not enough saved) or they can’t continue to work.

          • Vince Granacher March 1, 2016, 2:01 pm

            Or like I decided, I will get more enjoyment out of the money by taking at 62 rather than 70 as my health is much better now than what I expect it will be in my 70’s. Right now I am drawing at 62 and maintaining a part time job to fill in as supplemental income so as to not have to make major withdraws from retirement at this time.

          • Tony March 1, 2016, 2:05 pm

            Waiting until 70 to take Social Security is a scam. It’s ridiculous. You’re foregoing a huge amount of money from taking it at age 62. The only way it even pays to wait is if you live past the age of 82 or 83. Now, ask yourself, are you more likely to enjoy said money ages 62-82, or when you are older than age 82? (Hint: Life isn’t going to be so good after age 82 for most people).

            Take the money as soon as you can get it. It isn’t a savings account that you are leaving your children.

          • Dathan March 1, 2016, 3:25 pm

            I’m 36 so I think I’m ok to work for a few years. You might be right, I may not have enough right now but I might have enough to stop contributing and just let it ride whilst I work part time. Since 50% of my income goes to retirement anyway I don’t need to make six figures to live. So I could theoretically work half the hours, if I’m willing to stop contributing.

          • Jonathan March 2, 2016, 8:03 am

            If your income in retirement is too high, you face many tax penalties. If your income is over $84K, you pay extra for Medicare, if it is over $214K, you pay a lot extra for Medicare. If your income is over $200K, you pay Medicare tax on your investment income.

            By taking SS early, you spread your SS income over more years and lower your tax liability.

        • JB March 9, 2016, 12:50 pm

          You can always cut back to 3%. It all depends on what you spend your money on.

      • Dathan March 1, 2016, 1:28 pm

        Great post by the mad fientist, that was really interesting. I think I may choose to ‘retire’ earlier than expected, but still mess around working 15-20 hours a week so that I don’t have to spend down the portfolio, and let it just grow.

    • Mr. Purpose March 1, 2016, 10:57 am

      Yep, retirement is a bit of a Schrodinger’s Cat. You don’t know what type of retirement it will be until you jump in and try it. This is why flexibility is key, and why the 4% rule has to be taken as a single piece of information in a sea of research about investing and retirement.

      I think what scares many about investing principles is that they become responsible for their decisions, but when you throw it to someone else it can be something that just happens to you instead of something that you were responsible for. A lot of what I like about the MMM blog is that it is about becoming responsible for yourself. So when the market slumps in your first 5 years of retirement, you now have the knowledge and wisdom to pick up a wrench and bully through it.

    • caserole55 March 7, 2016, 7:09 am

      We DID retire this year (actually Jan. 2015). Our portfolio is now where we projected it to be 5 years from now. A little bit disappointing. BUT we have enough cash to get us through 2017. In the meantime, we are earning MORE from part-time work (that we love doing) than we anticipated, and we are spending LESS than we budgeted. At this point our draw is about 2%. No need to PANIC. Context – we are in our very early 60’s.

  • Tony February 29, 2016, 6:03 pm

    Interesting take to consider the “worst has passed”. 13% loss in the market? What about a 50% loss in stocks? Unheard of? Japan is stuck in the same deflationary liquidity trap for 27 years — and no, their stock market doesn’t go up 7% per year. QE did quite a number on US asset prices, but what is the next trick to boost stocks? If you learn some basic technical analysis, you will notice an increased probability of a contagion spreading from europe/asia over to our markets and some real losses about to begin (likely in the next few weeks). Or, just close your eyes and hope things get better……

    • Mr. Money Mustache March 1, 2016, 9:26 am

      Tony, this is one thing I would strongly disagree with: Technical analysis has been studied for decades and from everything I have read it is COMPLETELY bunk. Zero statistical predictive capacity.

      So any time I see a financial article even hint at the stuff as a valid investing technique, I know to move on. My advice to readers learning investing is the same.

      • Nicole March 1, 2016, 11:08 am

        CHURCH! There’s a reason ‘chartist’ can’t consistently beat the S&P500.

      • Zac Sanborn March 1, 2016, 12:23 pm

        Thank you for replying to this one, MMM! Doomsayers have been around since before Egypt had Pyramids and the world hasn’t ended yet (no fire or brimstone on the forecast, either).

        There are REAL, ENDURING advantages that the U.S. economy and open market have over much of the world, and I would personally recommend that people read the last 20-30 years worth of Warren Buffett’s annual letter to Berkshire shareholders (http://www.berkshirehathaway.com/letters/letters.html) if they are pessimistic about the future of the U.S.A. economy. His words of ultimate wisdom will sooth many a fear!


      • Trend Following March 1, 2016, 1:06 pm

        Momentum is a well known market anomaly, which sources it’s fuel from, amongst other possible candidates, price action / technical analysis. Plenty of academic evidence and commercial evidence to support this assertion.

      • David March 1, 2016, 1:29 pm

        Hi, MMM-

        I do agree that the technical analysis angle is hokum, but I do worry about US equities sliding into a long-term (read: a decade or more) slump or decline. The slowing of the Fed’s capital firehose, Europe and China both on the brink, a strong dollar discouraging exports, and the possibility of Trump at the helm make me very worried for the long term. And while stocks have been fairly consistent over the previous ~100 years on average [though an average is consistent by its very definition], the United States has been the dominant economic power for nearly all of that time. What if we falter on the world stage?

        Anyway, what I’m asking is: do these calculations work in a world where US equities aren’t the sure bet we always thought they were?

        Also, unrelatedly: I’m in a position where I have a substantial chunk sitting in my bank account and I would like to get into the market, but we’re considering buying a second house and putting our current one up for rent. This is a 2-3 year timeline. Is it still a good idea to buy or should I keep it in cash?

        • Mr. Money Mustache March 1, 2016, 4:03 pm

          As you state so well, there’s always one reason or another worry just a little bit, and this is a good thing: people worrying is what keeps stocks from getting even more expensive. But consider this:

          “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start” – Warren Buffett in his most recent annual letter to shareholders.

          The US has a lot going for it – an odd combination of open-season capitalism with just enough regulation to keep things from falling into totally crony-corruption inefficiency. A big, entrepreneurial population, massive capital infrastructure and a huge chunk of great land with plenty of it empty. That’s why I moved here, and why I’ll continue to bet everything on it.

          • steve March 1, 2016, 9:16 pm

            While WB is one of the greatest investors of all time, his musings can be quite contradictory at times – “Its crazy to time the market”, yet “You try to be greedy when others are fearful. And you try to be fearful when others are greedy”, etc. He warns about debt, but made a fortune using leverage (i.e. the float of his insurance companies). The man is a genius and legend, but Berkshire is so large now that he cannot time the market. His performance was best in the early years when he could buy when others were fearful, but it has been mediocre over the past decade or so as his business has become less nimble and he’s had to deploy money into capital intensive businesses.

            By WB’s own measures, the market is inflated:

            While I agree it is difficult to time the market (and therefore keep a certain minimum percentage in equities), I do believe that adjusting the % based on market conditions is warranted. Personally, I think this is not the time to be 100% stocks. Why would stocks be the only thing in which a buyer completely ignores price (tulips anyone)? People used to say this about housing or the Japanese stock market – “it will always make money over a long period of time”. The fact is any investment comes down to expected future cash flows – right now the 10-yr expected return on equities in the US is not fantastic if one uses prior history as a guide.

            So the question becomes are you getting enough of a risk premium to invest in equities and everyone may answer that differently depending on their situation and what alternative investment opportunities they may have. For me, a 3% return over 10 yrs isn’t that enticing. Over 30 yrs, I think the market will be fine, but for the next few years (esp. after a 7 yr bull), I’m willing to keep a little out of the market to see what happens (and have ammo should the market tank).

          • terredactyl March 2, 2016, 10:06 am

            Some more optimism from a well-placed source:

            “The US economy is set to ‘power ahead’ and push inflation back to target despite hazards overseas, a senior Federal Reserve policymaker said, as he talked down recession fears and flagged up risks associated with leaving interest rates too low for too long.”


          • Chris March 2, 2016, 10:50 am

            I generally agree with you, but I think you’re wrong in quoting WB here. Warren believes in being 100% invested only immediately after a major market downturn. Otherwise, he allocates more money to cash every year. It’s true that America has consistently performed well, but it has also consistently had a major downturn every 7 to 10 years. I think Warren would be fine with a cash hedge right now. Not predicting the apocolypse, just using data to my advantage.

            The most interesting thing to watch is the changing demographics in this country. Starting around the turn of the century Baby Boomer investment portfolios really started taking off. This helped create an explosing in the financial industry. Around 2020 50% of baby boomers will have entered retirement. That’s a big deal. What happens as one of the biggest sources of institutional investment capital starts to take their money out of the markets? This won’t change my investment strategy, but it’s definitely something that’s not discussed enough.

            • Tony May 30, 2016, 6:55 am

              Most likely they’ll be slowly replaced by the millennials, who will just be starting to enter their prime earning years.

          • Derrald March 2, 2016, 9:27 pm

            There is something to be said for having your market exposure be in the currency of your expenses. For example, it probably makes more sense to buy a rental property in the US (if that is where you live) rather than in Europe, because the market will not reward you for exposing yourself to Euro risk while maintaining US dollar expenses.

            Equities are somewhat different though. There are serious benefits to diversifying across global equities. And if you do this by market-cap you will still hold about 50% US stocks. There is no reason not to add one of Vanguard’s international funds to the mix.

      • JB March 9, 2016, 12:52 pm

        The USA isn’t Japan.

    • Joe M May 22, 2016, 11:09 pm

      I’m still waiting for the doom.

    • Jay Holden May 23, 2016, 10:36 am

      February 29, 2016, 6:03 pm

      “likely in the next few weeks”

  • Jeffrey Zirlin February 29, 2016, 6:04 pm

    First post. It helps to find indicators of fear in market participants and then investing more heavily when fear is present. The vix is an indicator that measures the amount of put buying which is basically portfolio insurance. Buying when the vix spikes has done very well in the past.

  • Jonathan February 29, 2016, 6:09 pm

    I am opposed to investing in funds, such as the S&P 500 EFTs. While this is better than nothing, there are a number of flaws that will undercut this strategy for many investors.

    First, most S&P 500 funds are cap-weighted. You buy the most of the biggest companies in market cap, and the least of the smallest companies. But size is defined by market cap. That means you are likely to be buying more, a lot more, or the most overpriced companies, and less of the underpriced companies. You are letting the opinions of millions of foolish and greedy idiots determine what’s in your portfolio, rather than deciding for yourself.

    Secondly, you have no idea what the fair value of a fund really is. If you investment plummets, you don’t really know what companies you own or what they should really be worth. The net result is that you panic and sell. This happens over and over with retail investors: they buy funds when the market is soaring, and dump them when the market sinks. They know intellectually that this is wrong, but when its real money that they worked hard for they can’t help themselves.

    This is why I have always invested only in individual stocks. When the market crashed in 2009, I could clearly see that the stock prices were ridiculous. Say you own a tobacco company like Altria that has a steady business and pays a fat dividend. In 2009, it fell to $15 a share. Am I to suppose that because the subprime mortgage market has collapsed, everyone is going to give up smoking? Yes, the stock is priced for the end of the world, but I’m still getting a 10% dividend and the business still seems to be chugging along. The real reason for the selloff, of course, was that people and institutions in financial trouble had to dump good companies for whatever price they could get to raise cash. The company was not worth $15, there was simply no liquidity to support its true value. This is when guys like Warren Buffett come in and buy. You should too.

    I have been investing in individual stocks for over 30 years, and I’ve learned how to design a portfolio that will produce consistent returns over long periods. It may not go up as much as the market as whole during booms, but I sure get my money’s worth when the market crashes.

    In order to do this, you have to be able analyze stocks and design your own portfolio. You have to have faith that your own analysis is correct, and will come through in the long run. Have I made mistakes? Lots of them. Do I still have plenty of money, and plenty of profits? Sure.

    • Tissue King February 29, 2016, 6:35 pm


      I agree with you on the individual stock idea. My 401k is invested in mutual funds and my Roth IRA is invested in individual stocks. Either way, I’m thinking I’m going to win.

      If MMM or any other person that talks about investing in a good S&P mutual with low fees is only half right then I’m going to be quite comfortable when my early retirement finally arrives.

      My stock investments are made with the Rule #1 philosophy and I’ve done quite well so I think a mix of my own investing with a touch of badassity (mutual fund) mixed in will allow me to sleep in late with comfort.

    • Chris February 29, 2016, 6:43 pm

      “Secondly, you have no idea what the fair value of a fund really is.”

      LMAO! No one has any idea what any fund is really worth. IPOs fail all the time. Companies come out of nowhere to bebhge and others crap out.

    • Bob March 1, 2016, 3:33 am

      FYI the S&P 500 Index is actually Free-Float Weighted (http://www.investopedia.com/terms/f/freefloatmethodology.asp). The difference It’s not significant for most companies, but it can be when there is large holders. For example the Walton’s till own over half of Walmart (https://finance.yahoo.com/q/mh?s=WMT+Major+Holders), so the free-float market cap is half the total market cap.

    • Teltic March 1, 2016, 7:41 am

      You say the S&P is a bad choice due to it being a market cap weight. Larger companies are somehow overpriced compared to small cap companies? That’s not how it works… Instead of looking at their cap weight, you should look at P/E ratios if you want to know whether they are “over priced” or not. 60% or more of
      Money managers cannot beat this “ETF that buys over valued companies” fund.

    • Bill March 1, 2016, 9:42 am

      Have you looked objectively at how you have performed vs. an S&P EFT or Vanguard?

      • Jonathan March 1, 2016, 11:22 am

        I said in my post that my portfolio does not go up as much as the averages during booms.

        Few people realize how much of the S&P is gambling-type stocks, where the hot money is making bets on what will happen in the future. These stocks goose the return on the averages during a boom, but you are still placing bets on things that may or may not happen. Will Jeff Bezos be able to turn his market penetration into large profits someday? Will young people continue to hang out on Facebook, or will they all decide to go somewhere else? Can Netflix really dominate the world in video entertainment? The people buying these stocks are gambling their money on future events. And the irony is, even if Amazon suddenly became highly profitable, it would be worth little more than it is today, because that future event is already baked into the price.

        Now when I buy a company trading at eight or tens times earnings, with a nice dividend and good balance sheet, I’m willing to settle for what’s happening right now. They only have to continue doing what they’re doing, and grow slightly with the economy, for me to make money. I don’t have to worry about the next fad; I know customers will continue to buy electricity, cardboard boxes, and gasoline for a long time to come, and will buy them from large established companies that are very good at producing and selling these things. I collect my share of the cash flow and I’m happy.

        My advice for investors: don’t look back, don’t look at what the gamblers are doing, buy good stocks at low prices, and be happy collecting your reasonable returns. In the long run you will beat everybody. My main portfolio is currently paying dividends of 4.6% on its market value, and 7.2% on what I originally paid. That means I only need a 3% annual capital increase to make my 10%. You can’t beat that, although you can certainly lose a lot of money trying!

        • Bill March 1, 2016, 4:02 pm

          But if you’ve been at it for 30 years, you have a long enough history that you should be beating something. Or investing in that thing.

          • Jonathan March 2, 2016, 10:55 am

            This is very difficult to say.

            First of all, the first 20 years I invested, I just dabbled and made all kinds of bonehead mistakes. I was only running relatively small amounts of money in the market, about $50-200K, while the bulk of my money was getting nice returns in short-term cash. I really missed a lot of opportunities, and if I knew in 1991 what I know today, I’d have $20 million now.

            So let’s take the last 10 years, which is 2006-date. With the huge stock-market boom of 2009-15, my theory would predict that my portfolio would underperform for defensive reasons.

            I order to see what my stock performance is, I have to back out the cash/CD component of my portfolio. Let’s say I average 40% cash/CD during this 10-year period, and am only 60% invested in the stock market. Let’s assume I average a 1% return on the cash. That would make my total return on the stock portion about 6.93%, compared to the S&P average of 6.46% during the same period.

            Now, the main test for my theory is not during booms, it’s during busts. If there was a prolonged downturn where the S&P went down 20-30%, then my portfolio should go down much less. That’s the theory. But you do notice the 40% cash, just in case.

            • TLea May 13, 2016, 10:37 am

              I’m very late to the game here and who knows if you’ll ever see this, but here it goes anyway. You say you have been investing in individual stocks for 30 years. You don’t get to just show us the last 10 years of your investing. Those first 20 years were your learning curve. Anyone who starts investing the way you do is going to have a learning curve as well. I don’t know whether your way of investing is better or not but I do want to know the true cost of the learning curve before I decide to head in that direction or not. Please do the same comparison that you did above showing the last 20 years, minimum. I believe that would be a true and fair comparison. Thanks.

        • Colby March 2, 2016, 10:50 am

          Is this a strategy you would recommend to everyone? There seems to be a lot of time and skill involved in your portfolio. When you tell others they should pick good stocks, do you really believe the majority of them will make good choices? And then factor in the time it would take doing research to build a diversified portfolio. Compare that to simply clicking a button to buy a S&P 500 ETF. It’s simply not worth the time and effort, especially when you consider the index is the benchmark for performance. No work to hit the benchmark, or a lot of work in hopes you might out-perform it. And if history tells us anything, people are extremely unlikely to beat the market.

          • Jonathan March 2, 2016, 11:50 am

            Of course not! Few people are qualified to think for themselves, and have the courage of their convictions to act against what the mass of people are doing.

            I would hope to find a higher percentage here than elsewhere, but most people just don’t have what it takes. You need both the intellectual ability to analyze companies and industries, and the emotional makeup to stick to your picks even when they go down.

            But there are a few people like this, and they really do make tons of money.

            • Bill March 3, 2016, 9:02 am

              Sounds like a job. I’m already very good at my job, and I have no interest in another one. I want my money to work for me for a change.

            • Gwen March 13, 2016, 5:06 pm

              The issue is skill takes a long time to show and it’s hard to tell luck apart from skill. Many people believe they have the intellectual and emotional capacity to beat the market and they try to pick out individual stocks. Chances are they are not as capable as they think and they will only learn this lesson a couple decades too late.

    • Travis T March 6, 2016, 6:53 pm

      If you love picking stocks then keep it up. For the rest of the world who wants to spend time doing other things, go for the S&P 500 index. That’s the advice from this investor:


      I also wouldn’t recommend betting against it:

    • The Long Haul Investor March 7, 2016, 12:56 pm


      I do agree with a some of your principles and follow them myself, but it’s just not a reality for everyone and we must be willing to accept that of others.

      The definition of a good stock can be entirely different between for different people. Also the risks in individual stocks is large until you build a well-balanced portfolio suitable for your individual risk tolerance.

      What defines a good stock can take time to learn on your own even with all the great information out there. Even professionals in the space mess this up constantly. Plenty of people have no idea how to analyze stocks including those with accounting or finance degrees. It’s a lot of work that takes time to master and learn. Many people do not simply want to, or can’t devote that time for a variety of reasons.

      A great example would be VIAB. An investor buying in 2013-2014 would have likely bought with a P/E between 11-15 which is considered pretty reasonable. Today there are investors sitting on 50%+ losses. That’d be painful to swallow for a lot of people even with the dividend. Now at this price level it’s probably a much better buy and a raging good deal to other investors, but to a novice that bought the last 2yrs it’s much harder to convince them to buy more.

      I’d agree indexing has its disadvantages, but it is also better than a novice investor getting into penny stocks or not investing at all. Also using WB’s contrarian advice is tough for plenty of people. When friends ask me about right now and I tell them it’s been a great time since August’15 to put money in they all think I’m crazy. Their response is usually “Are you sure because it’s been going down?”. Tough to change the mentality that’s inherent within many people. The real strategy is to figure out for people what risk tolerance they can handle, and developing a strategy to their needs which can give them the most success long term.

      The last thing is to make sure a long time horizon is used. It’s not about timing the market so much as it is about time in the market. However if you can learn to overcome emotions and buy stocks when the market is going down then you should be able to realize even better results over time.

  • Daniel February 29, 2016, 6:12 pm

    It always amazes me when people freak out about flucuations in the stock market. Much better to watch your dividends. You can think of the stock market like a grocery store. If you are looking for some tomatoes, are you going to freak out if they are on sale 30% off?

    • Bill March 3, 2016, 9:04 am

      Retired people or people with a sizable stash should definitely be invested at least partly in some blue chips or other dividend-producing stocks. It’s very satisfying to have your money pay you. And when the stock price drops, to be able to buy more to pay you more. It’s very easy to hang onto a stock that actually pays you now and then.

  • Tissue King February 29, 2016, 6:27 pm

    I used to get scared and sell but these days I jump on the bucking bull and win the ride. When the market takes a dive, its time to get in. I learned this quite well in 2009 as I decided to invest more not less money in my 401k. As Warren Buffett says, “Be fearful when others are greedy, and be greedy when others are fearful.” This quote is fact.

    Patience is all it takes. Jump on opportunity and ride it out to win this challenging game. Don’t listen to others as they run to the woods and turn off the damn TV. MMM told us all that a long time ago.

    I’m loving the dive that this market is taking. It’s like a dumpster diver finding a gem in that dirty ass dumpster. Cha Ching!!!

    Please keep going down so I can keep buying this market on the way down and at the bottom (wherever that may be).

  • Brilliantine February 29, 2016, 6:27 pm

    I’m happy to follow this super-simple advice but just so you know, there is some pretty convincing language out there. Most recently vox.com published a piece by Timothy Lee as a response to a NYTimes article. The NYT article advises people to just be in a 100% stock allocation all the time . Timothy says this would be bad if we ended up in a market that looks like the Japanese stock market of the last twenty years.

    Here’s the link to Vox. The NYT article is linked in that.


    • Freedom35 February 29, 2016, 8:45 pm

      The article you linked to points out that a 65 year old who can never work again should be cautious with their savings. That may or may not be right, but either way the situation is very different for a young person still accumulating, or a young retired person who has the freedom to be flexible.. they can be much more aggressive and have less to worry about.

      If your worried, diversification is the only free lunch you will get in investing: a bit of US stocks, a bit of international, a small amount of bonds and you have your bases covered.

    • HeadedWest March 2, 2016, 9:28 am

      At the beginning of the Nikkei bear market around 1990, that index had a P/E ratio of about 78. The forward P/E ratio of the S&P is currently around 16… if it ever gets above 50 then yeah, I’ll bail out. I’ll also have so much money in the bank that I will have plenty of time to consider alternate investments (rentals, etc) or just sit on cash and wait for the bubble to pop.

      Until then, I’m staying in the S&P.

      Source: http://socialize.morningstar.com/NewSocialize/forums/p/205518/205518.aspx

      • Steve March 2, 2016, 9:29 pm

        Forward PE is dangerous as it implies one actually puts faith in Wall Street predictions. Based on trailing PE the market is over 20, which would give famous investors like Ben graham some concerns..
        CAPE is similarly in high range as well. s&p earning are actually down despite each yr Wall Street predicting it to be higher (we’re nearing an earnings recession despite super high stock buy-backs and record high unsustainable profit margins).

        • HeadedWest March 3, 2016, 4:49 am

          Fair point. I’m not arguing that the S&P is/isn’t overvalued right now. I am trying to say that we are a long, long way from a Japan-like scenario that frequently elicits concern in the MMM comments and forums.

    • James March 9, 2016, 10:06 pm

  • isaac February 29, 2016, 6:31 pm

    If your only investment criteria is profit, then you are telling the market that corporate sociopathy is OK.

    • Jonathan March 1, 2016, 7:13 am

      That is part of the irony of MrMM-type living. While you yourself live frugally and wisely, you take all the money you save and invest it in companies that cater to people who wallow in extravagance and vice. This makes you incredibly wealthy, but you never spend any of the money.

      • brent March 1, 2016, 11:31 am

        Interesting and valid perspective for sure. But, with the MMM and FI way, you are buying time and freedom. For most people in cubicle-land, those are very valuable items.

      • Mike S. March 2, 2016, 9:51 am

        In defense of MMM, he’s also trying to convert others to follow the same path.

        I think if we all consumed less, fewer companies that wallow in extravagance and vice would survive.

      • isaac March 3, 2016, 10:40 pm

        I meant to respond to this earlier, but for whatever reason my post didn’t post as a reply.

        It isn’t just companies that produce luxury goods that I am taking about, investing with the only criteria being monetary gain means oil spills in the Gulf of Mexico, and what borders on slavery in parts of Central America and Africa (and amongst migrant workers, even in the US), it means investing in oil instead of solar/wind (*), it means investing in a world where turning a buck is suitable justification for naked sociopathy.

        The most effective means we have for asserting control over our corporate overlords are strikes, boycotts and shareholder activism. If we don’t use these tools, we are still sending a message to the corporations that we work for/buy from/invest in, and that message is “what you are doing is acceptable”.

        * arguing about rather or not oil really is a better monetary investment is completely missing the point.

        • Jeb March 4, 2016, 12:28 am

          I think you’ve wandered into the wrong discussion.

        • Jay X March 5, 2016, 10:52 am

          Seems to me like learning to live frugally and inspiring others to do the same has the same effect as a very large, widespread boycott.

          Companies do evil, harmful things to satisfy consumer want. In its absence they’d probably do a lot less.

        • Mark March 6, 2016, 2:35 pm

          I think MMM covered this in one of his other posts a while back. The short version: He believes the most effective way to make evil companies behave is on the consumer side. If Americans consumed oil at the same low rate as the MMM family, that would mean a lot less need for drilling in the first place, which means maybe drilling in expensive places like the Gulf of Mexico wouldn’t even be considered…which means maybe that oil spill wouldn’t have happened.

  • Anonymous February 29, 2016, 6:34 pm

    Betterment forces you into a large international allocation, and international has done badly compared to U.S. over the last 10 years. The U.S. is just better.

    • josstache February 29, 2016, 7:51 pm

      VTI has done badly compared to the Shanghai Composite index over the past 10 years, therefore Chinese stocks will continue to outperform US stocks over the long term.

      • Mr. Money Mustache March 1, 2016, 9:16 am

        Heheh, nicely said everyone. And also, my current house in Longmont has appreciated rapidly since I bought it in 2013, so I should sell all my index funds and buy more Longmont houses!

        • Gina March 1, 2016, 10:48 am

          Well, my DH would be happy with this, he jokes frequently about being your neighbor.

        • Vince Granacher March 1, 2016, 2:15 pm

          And a .01 savings account has outperformed the stock market for the first two months of this year. So I should sell all my equity holdings and put it in a passbook savings account. Not gonna happen. I rode this market down to the bottom in March, 2009 only to see it all come back and then some, allowing me to feel comfortable in my decision to semi-retire at the beginning of this year

        • Maximus March 4, 2016, 6:14 am

          Hey MMM,

          After I had invested in a competitive CD, LC, Vanguard, maximized my 401K I decided to buy two rental properties. But immediately after I bought them I felt in discomfort with being in debt and I also noticed that the total real estate interest was taking more money from my pockets than the total interest generated by all my investments was able to make me. I then decided to attack real estate debt aggresively and I went ahead and liquidated most of my investments and put them towards mortgage principal payments. I was able to pay off one of the properties in short time and I am now beating down the one I have left. My current plan is to finish paying of that second property and then begin to rebuild my investments. I could not stop seeing paying interest to the banks as a hole in my gold bag. I know there are many strategies that work out there but I would like to know what you think about this one. Thanks for your great work and inspiration!

    • BadenWürttemberger March 1, 2016, 4:43 am

      Obviously, when a market rises more compared to other markets 10 years in a row, we can extrapolate this returns forever because valuations doesn’t matter.

      For further reading: http://mebfaber.com/2016/02/25/ranking-global-stock-markets-on-valuation/

    • CTG March 1, 2016, 9:03 am

      Its possible that the US is just better. Or its possible that the international market is way undervalued relative to the US. I would bet its the latter, but I honestly don’t know.

      I highly recommend “The Telltale Chart” by John Bogle: https://www.vanguard.com/bogle_site/sp20020626.html

      Anyone making a statement like “International/large cap/growth/financial/whatever stocks have underperformed the past 10 years, therefore we can expect them to do so in the next 10” needs to think hard about that.

  • Bob Popular February 29, 2016, 6:50 pm

    1,932 (today’s close for the S&P 500) doesn’t constitute anything close to “a sale on stocks.” When the S&P falls below 1,000, that will be a sale.

    • Mr. Money Mustache March 1, 2016, 9:23 am

      Sure.. I’d love a sale like that. But what if it never drops anywhere close to that low? It could bump along like it is, continuing to pay dividends and eventually go up. Or it could roar up to 2000s valuations and stay there for a decade.

      I like to look at the big picture: 10-year-averaged real P/E ratio since 1890: http://www.multpl.com/shiller-pe/

      That graph shows the market is still somewhat “expensive”, but it doesn’t let me predict the future enough to forego stocks altogether. Expensive stocks just mean you’ll get lower average returns – not negative ones.

      • Jonathan March 1, 2016, 11:53 am

        The sale you have in mind was held on March 6, 2009, when the S&P hit 666.79 That was a 1-day event, never to be repeated.

        Even I was too chicken to buy!

      • Bob Popular March 1, 2016, 7:56 pm

        I’m familiar with the Shiller PE and appreciate you posting the link. If 2000 is your reference point, 25 may appear to be a reasonable valuation level, but looking at 100+ years of history, investing at this level hasn’t resulted in anything close to sustainable returns. And measures that are even better correlated with market performance indicate that today’s valuation level is even more extreme – above every point in the last 100 years, including 1929, but still excluding 2000. Whatever the case, as you suggest, it’s critical to look beyond the last 15 years, which have been dominated by historically extreme valuations and three market bubbles, the third of which will eventually (I would suggest soon, but that’s a separate conversation.) be resolved just as others in the past have been. History tells us the average bear market from this level will easily take us back below 1,000. Fortunately, you and I will both be happy when we get there.

        BTW, I’m a big fan of the blog and don’t mean to be argumentative. I simply think this is context your readers should consider.

      • Jbo March 30, 2016, 11:49 am

        Hi MMM! Long time reader, 2nd time commenter.

        Bob Poplar brings up a good point. Stocks by historical comparisons are at very high valuations. This does not mean that they can’t go higher and remain there for a long time, but chances are we are due for a more corrections. If those corrections are anything like the dotcom bubble bursting or a repeat of 2008 (or worse!) you will have a lot of stashes wiped out in a hurry.

        Be honest with yourself and see that a majority of your readership would be much worse off than yourself if they were to lose 50% or more of their stock value over a year and a half. History shows we are irrational and sell low and by high. You might be able to hack it, but most will not. And dreams of early MMM style retirement will be crushed.

        That’s not to say stocks are not important part of a properly diversified portfolio. But if all you have are low cost stock and bond index funds, you are NOT diversified!

        My point is that you can never know what the financial future will be. But you can build a portfolio that is low cost (via index funds), simple to maintain (you can also make it as complex as you want), provides SUPERB stability and generate excellent returns. In fact, I’d say this is the most BADASS portfolio idea I’ve ever come across.

        The following h

        25% – Stocks (in a broad based stock index fund like the S&P 500)
        25% – Long Term Treasury Bonds
        25% – Gold Bullion
        25% – Cash (in a Treasury Money Market Fund)

        • Jbo March 30, 2016, 11:56 am

          Oops! made a early submission. To finish my thought:

          The evenly split 25% allocation mentioned above has generate a 9.6% annual return over the period of 1971 – 2012. On top of that, it only had 3 negative years with a maximum loss of 4.1%!

          But don’t take my word for it, check out the numbers here (http://www.crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/)

          I’d like to close by saying that if you take the time to read up on this portfolio, you will be pleasantly surprised by how simple & effective this method is. It could serve my fellow Mustachians well if they are looking for stability and surprisingly good returns!


  • Mr. Thriftyskate February 29, 2016, 6:56 pm

    Amen. Mrs. Thriftyskate and I are still getting our ‘stash together. For us it’s a great buying opportunity. We’re not selling anytime soon. It’s only a loss when the asset is sold.
    If we did need to sell, it would mean things have gone terribly wrong. It would mean we lost the ability to cover our expenses with only ONE of our paychecks. Then burned through our cash buffer and emergency savings. Then we would need to sell stocks. At that point I would not be concerned about selling for a loss – I would be desperate for the money. Build that cash buffer first, then the e-savings, then invest. Only take the risk in the stock market when you can afford it. I leave out the option of selling the house because that may not be a net positive transaction in bad economic times – or even an option for some people.
    A few of my friends have only seen the recent good times in the stock market. If the market keeps heading down – during which we will be furiously buying – I’m interested to see their reaction… “I though it only went up?!”

  • Jim February 29, 2016, 7:02 pm

    Right before the market shift, I moved everything in my 401(k) over to a target retirement account only because it had what I was after – a low expense ratio (.18) along with being a majority domestic index fund, some international, and a small piece being bonds. I’ve been very happy that I made the change which simplified things dramatically.

    In my Roth IRA, I’ve been investing in dividend stocks, which are currently reinvesting.

    More importantly though, I’m about 9 1/2 years from reaching financial freedom. So for the time being, I kind of hope the market takes some pretty good dives so I can keep buying everything on sale. That would be great for me!

    — Jim

  • ConArtist February 29, 2016, 7:14 pm

    Why max 401(k) first? Aren’t most of us here going to need the $$ way before 59.5?

  • Jason February 29, 2016, 7:19 pm

    How about some Municipal Bonds! I love my municipal bond fund, and have it enrolled in a DRIP. It provides tax free income, and has very little volatility. Check your state tax rules, as they may differ between states and funds. Some funds are state specific, thus avoiding Federal and State tax :)

    • Mr. Money Mustache March 1, 2016, 9:35 am

      Thanks Jason – nothing wrong with bonds (and in fact many of the auto-portfolio services do invest in Muni bonds as part of their bond allocation).

      What bond fund are you using?

      • WageSlave March 1, 2016, 11:40 am

        I’m not Jason, but I use Vanguard’s VWIUX (“Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares”) as my muni bond fund. Vanguard also has Short- and Long-Term options (of the same concept), and also Investor class shares of the three.

        Though I wouldn’t dive in to muni bonds without doing some research. The tax-exempt status is nice, but generally only makes them worthwhile if you are in the top marginal tax bracket. In other words, take the time to compare post-tax returns of a traditional bond fund (e.g. BND) versus the untaxed returns of a muni bond fund. If you can get the same or better after-tax returns with a US Treasury fund (e.g. VFIUX), go that route, as that would be lower risk. (And Treasuries are exempt from state taxes.)

        Also note: I can’t think of a situation where it makes sense to hold munis in a tax-advantaged account (401k, IRA, etc).

  • Matt February 29, 2016, 7:23 pm

    After 26 years investing and now that I’m retired I see indexing as a much smarter play. It is tax efficient and over long periods of time managers can not beat the market. On top of much higher expense ratios. Everyone who buys individual stocks and says how they do so well have to be taken with a grain of salt. The time they spend on it and accuracy of their stated returns? For the average investor Vanguard index funds provide a great wealth building path. Also check out Paul Merriman .com he does extensive research on indexing and withdrawal strategies. He shows real life examples of 4,5 and 6% flexible and fixed withdrawal rates. It really is interesting and put my mind at easy when I need to pull from my portfolio.

  • Alec February 29, 2016, 7:26 pm

    I would caveat that it all depends on your situation. If you have been plunking away a good chunk into a 401k religiously every month for a few years or a decade or two, then yeah, this is pretty good advice. You have already realized some serious gains, and the feeling of getting more shares “on sale” feels true, since you’ve already purchased shares over and over for a long period of time at a wide range of pricing.

    Another situation (call it mine) is I am a 50 year old with a medium size chunk of cash, that has been sitting on the sidelines for a long time, due to fear and stupidity. Plunking the whole thing into the market right now would be moronic, because the risks are just too high right now to make that kind of choice. And let’s face it, I would be more likely to sell out low due to watching the value of my portfolio wither away year after year if things go poorly, especially with my age.

    There is this pesky thing called reversion to the mean to think about. The markets are going to take a breather now and then due to the business cycle. Things go bonkers, then they pause or contract for a while. It’s just the way of the world. By many measures, the markets may not be ridiculously overpriced right now, but they sure aren’t cheap. Corporate earnings have not been growing at the same blistering pace they were a couple years ago, things seem to be slowing down.

    So for me, I have waited it out a long while already, so there is no reason to dive headfirst into the pool now. I’m going to wait a while longer and see how things go. Maybe I will be able to buy shares at significantly lower prices than today, or maybe I will get left in the dust again. Who knows!? Risk/reward isn’t that great right now though. I would just caution others to keep your own unique situation and personality in mind before making big investment decisions. But by all means, save, save, save!!!

    • Bill March 1, 2016, 9:48 am

      Dollar-cost averaging is the way to get back into the market in that situation.

    • Steve March 1, 2016, 12:37 pm

      Great hypothetical example showing how the world’s worst market timer over the last 40 years still turned $184,000 of total investment into $1.1 million.


    • Vince Granacher March 1, 2016, 2:24 pm

      I agree with Bill here. Buy some now, buy some in the near future, but consistently do this over time. The key is to not panic if the market goes down after your initial investment. You just get to buy more at lower prices if that happens. A few years back, Warren Buffet took out a large position in IBM at about $200. That is now at about $130-$135. What did he do? He increased his holdings.

    • Ron March 3, 2016, 2:52 pm

      Alec – I’m in a similar boat. I have a medium size stash that I moved into cash about 6 months ago due to fear. Fear that values could be cut in half over the next year or so which would hit close to home since I will be ‘retiring’ in three months at age 50….after becoming mustachian, radically cutting expenses, and increasing saving to about 50% in recent years. I know, I know. Don’t try to time the market! However, the risk that I could take a big hit within the first year or so of retirement is too much to bare so I’m being cautious and sitting on cash due to business and market cycles that have become more sever in recent times. I am hoping that the next market route comes soon. I would get back in and probably stay in for the forceable future. I have a really hard time imagining that the market will take off and I’ll be left in the dust. In the meantime, I’ve implemented many MMM strategies so my low cost of living helps offset lost dividend income, etc., while I wait patiently and sleep well.

      • steve March 3, 2016, 9:04 pm

        Ron and Alec-
        I agree with you both – now is not the time to plow a substantial amount of cash back into the market. Could we be wrong and the market promptly shoots up 50% in 3 yrs – sure – but unless that increase is accompanied by a similarly spectacular increase in earnings then that simply means the market has ascended into sure fire bubble territory. It is hard to get excited about putting money into the market when all typical valuations measures (Shiller 10 PE, GAAP PE, Stock mkt / GDP, etc) show that the market is being valued very highly. In addition, earnings continue to fall (despite record high and likely unsustainable profit margins) and financial engineering via non-GAAP pro forma earnings is back in vogue…..

        Valuations need to come down or earning/revenues actually need to show some signs of life before I change my allocation to be more concentrated in stocks again. And note that earnings PER SHARE are coming down despite CFO’s buying stock left and right via buybacks to help their option values (and hold onto their jobs longer). In fact, if earnings continue to come down and valuations climb more (say S&P 2050) then I will take even more gains out of the market. People love to tell others “not to time the market”, the “market always goes up in the long-run”, etc. but at the end of day you are buying businesses (as WB says). Would you rush to buy a business at a high price and one in which earning are flat to what they were 5 yrs ago?

        Personally, I am still keeping roughly half of my assets in the market (which is a low allocation to equities for me). The issue that everyone faces is what to do with the rest. Bonds are not looking great as rates near zero, REIT are valued very richly based on historical standards, and so I’m approaching this dilemma in 3 ways: 1) paying down debt (even though rates are fairly low its a guaranteed return) , 2) selling a small amount of put options (10% of portfolio) to either earn income or get back into the market at lower values, and 3) rest is in a stable fund which will likely break-even lose a tiny amount on a real return annual basis if you factor in inflation. I do think that the market does have some select stocks that are at decent prices, but I do not have the time currently to properly analyze them and weed them out from the Amazons of the world that sell at stratospheric PEs.

  • Steve February 29, 2016, 7:51 pm

    Pretty much. When you look at stock market gains and losses over the short term, you’ll doing this whole thing completely wrong. Investing in the stock market isn’t about the short-term. It’s about investing and forgetting it until well into retirement. Historically, this shit works.

  • Lindsey February 29, 2016, 7:59 pm

    It is so hard to fight the urge to follow the masses, so I have to recite Warren Buffet whenever I feel the teensiest bit like I need to do some serious reallocations in a market like the last few months.

    ‘Be Fearful When Others Are Greedy and Greedy When Others Are Fearful’

    I have friends in their 20s who are so afraid of investing in mutual funds because of the perceived risk, when they don’t understand that it is riskier in the long run to NOT invest money. You will lose it through inflation.

  • Peter February 29, 2016, 8:16 pm

    The quote in the beginning of the article is quite sad and very wrong. Mr. Warren Buffett himself says if you are a net buyer, you want stock prices to languish so you can buy quality assets on the cheap. Very similar to going to the grocery store where if you find a sale on your favorite drink. You are quite ecstatic that the drink is on sale. Who goes “Yes!” when they see the 2-Liter Coke bottle they bought last week go up in price? Umm, Nobody!!

  • Joan February 29, 2016, 8:26 pm

    Okay! If stocks are on sale, it’s time to buy, but how? Canadians: If you had 500,000 in cash, all tax sheltered in RRSP/TFSA, to invest right now, And won’t need it for 10 years, what would you do? What would you buy? …Staggered entry over what periods of time? /all at once? Would you focus dividend or growth?

    • canuckgameguy February 29, 2016, 9:17 pm

      All at once Joan. And I follow the aggressive Vanguard portfolio from the Canadian Couch Potato.


    • Mr. Frugal Toque March 1, 2016, 7:40 am

      My money is split between index funds: mostly Canadian, international/American, European and a small amount in “emerging markets”. I have nothing, as best I can tell, in any precious metals and there may be small amounts of Canadian Bond funds in one of my Mrs. Toque’s holdings, but we usually don’t hold that except through some accounting accident.
      So far, all of it *is* tax sheltered, but that will likely change this year as I’ll max out my shelters.

      • AnonymousEngineer555 March 1, 2016, 8:20 am

        I’m having a hard time adding to VTI with the current exchange. Is it still the best idea to buy this or add more Canadian holdings considering the exchange?

        • Lynne March 1, 2016, 4:45 pm

          I treat exchange rate fluctuations the same as I do stock market fluctuations – ignore them, and keep adding my money every paycheque according to my established allocations. I don’t think trying to time the exchange rate is any better than trying to time the market – you might get lucky, but you’re usually better off not doing it.

          …If you are actually buying VTI instead of VUN though – are you putting enough in at a time to make the currency exchange costs worthwhile (like, at least a few thousand $), and using Norbert’s Gambit? If not, I would just stick with VUN.

    • Travelling Biologist March 1, 2016, 2:39 pm

      We also follow the aggressive Couch Potato Vanguard portfolio, and recently bought in a large lump sum all at once as we were transferring from a managed account.

  • Running Up Freedom February 29, 2016, 8:32 pm

    I’m early on my journey to financial freedom and – no matter how many times I hear this message – it always give me a sense of comfort. Rationally, I know there is absolutely not reason to panic, but I can’t keep myself from the occasional painful flinch when I see my numbers drop. As a former ridiculous over-spender, I can also easily relate to the message of buying “on sale”. I’m just glad these days “a sale” means sinking more into investments at a good price vs. buying yet another shirt to toss into the closet or another toy to further clutter my kids’ rooms.

    • Tyler March 2, 2016, 5:45 am

      I wanted to comment and say that I just found your blog and I’m really excited to read more as time permits and to see where everything goes for you. My wife and I are in a similar situation and I really interests me to see other people shooting for the same goals. Well I guess without the mortgage, student loans or kids so maybe we don’t have similar situations at all:P

      Nevertheless I’m excited to continue reading your blog!

  • Andres February 29, 2016, 8:48 pm

    Heh, I like your hen analogy. I usually use the toilet paper analogy when explaining this to people.

    Everyone needs toilet paper*, right? You can use lots of it or be frugal with it, but you need to wipe your butt either way. So you’re going to go to Costco and buy a 24-roll. Are you going to stress out and sell your pack in a panic when your 24-roll goes on sale next week and is worth $10 instead of $15? No, you’re going to say, “ooh sale!” and buy another pack or two. Maybe when it’s expensive, you’ll hold off on buying until it’s on sale, or maybe you’ll just grit your teeth and buy it. Either way, a sale is a sale, so stock up!

    * Ignoring the fact that I actually use a bidet and don’t need toilet paper, but.. let’s talk about everyone who isn’t me.

  • DCJRMusctachian March 1, 2016, 12:41 am

    As a vegan I was kind of grossed out by your example of eggs and hens. But yes, it’s the oldest investment advice in the book. Buy low, and stick to the 4% withdraw weather the storms!

    If your investment is safe, the lower market value means your taxes went down.

  • Dej March 1, 2016, 12:54 am

    A friend shared this blog with me a bit before Thanksgiving, and as of today I’ve read everything (except articles about Canadian retirement law), that you’ve written. Just wanted to say thanks. There are so many people out there writing the same trite things over and over again, that it’s refreshing to see so many unique perspectives in one place.

    As I was reading through this post, I thought sure you’d link back to “Shopping with Your Middle Finger” and this relevant sentiment: “I like to think of it as a little algorithm:
    – if a food is drastically underpriced, buy a near-infinite amount, limited only by shelf life of food and available stock on shelves. If Bananas go to 1 cent per pound, you can’t really benefit. But if rolled oats dropped to an all-time low, I’d probably buy at least a year’s supply (100 pounds).” The thought process works pretty well for the stock market too.

    Lastly, there is a typo in the ‘How To Invest in Stocks’ first paragraph above. ‘To own’ appears to have been replaced by ‘town’

    Keep up the good fight.

    • Vince Granacher March 1, 2016, 2:30 pm

      Bananas at $.01 a pound just means banana bread in the freezer to enjoy once bananas hit $5.00 a lb.

    • Brett Burkhead March 20, 2016, 7:19 am

      Excellent article. I learned a lot. My take away is that the market is high, but what is the alternative? The way I see it stocks in aggregate pay inflation (2-3%), dividends (2% ish) and earnings (2-3%) that rolls up in an expectation of 6-8%. However, PE10 suggests that the market is roughly 35% overvalued.
      Looking at real estate, you get inflation (2-3%) plus rents (area dependent). I like the Midwest, where I think that I can do better. I do not recommend real estate to those starting out and MMM has several posts on his experience. However, if you can find a good rent and area and you have a serious stash it may be worth considering.
      There are costs involved in real estate. However, the costs hidden in a lot of 401Ks should also be taken into account when comparing. There is an excellent PBS special by Jack Bogle on this. http://www.pbs.org/wgbh/frontline/article/john-bogle-the-train-wreck-awaiting-american-retirement/
      Thank you.

  • Daniel March 1, 2016, 1:36 am

    Great reminder and I totally agree with the strategy to buy and sell stocks over long periods of time and buy more when stocks are down. This is a realistic strategy when you are working and have a decent income but once you are retired and have little extra income what do you buy these “stocks on sale” with?

    10% down is nothing to write home about but recessions usually let stocks drop by 35% to 55% (some argue that the drawdowns have become and will become more exagerated rather than less). Of course, we do not know when such a drawdown strikes but it is fairly certain that we will experience an episode like this in the next 20 years. Just to bear in mind to be mentally prepared and not panic.

  • Felipe March 1, 2016, 2:07 am

    Still early in my stashin’.

    Excited for these big crashes I keep hearing about but all I see is a meager 10% discount on the USA market.

  • Jan March 1, 2016, 2:46 am

    Well, I am just 34 now. When I turned 18 I got a small five-digit amount of money from my grandparents to start a retirement font which I put in an index fund. Even using IndexView just now shows that since 2000 the S/P 500 has an annual growth of only 3.7%. (Actually I had a different one being based in Europe but it did not do to different)

    I have a dividend reinvesting fund with roughly 0.6% costs plus roughly 0.4% depot costs. Additionally the tax system here implies you annually have to pay about 1.5% of everything you own in stocks, funds etc. Yes, also in years the market is done.

    Result is that on the initial investment from 2000 on my 18th birthday now 16 years later I have not even a total growth of 20%. I did frequently invest since I started earning money in 2010 and for a few years now do earn a decent salary, so my annual average on my investments overall is slightly better. But still far from 7%.

    That makes it quite hard to believe a 4% withdrawal would be possible.

    I dont doubt index fund investing is for the big majority still the right thing. I do doubt commonly given advice including here are realistic though. So far it does not work out for me.

    • Mr. Money Mustache March 1, 2016, 9:13 am

      Wow – I had heard of that taxation system (are you in Germany?), but when you put it that way it sounds like a serious blow to the idea of potential early retirement. A 1.5% recurring wealth tax is equivalent to a 33% tax on early retirement!

      So you’d either have to save more, work longer, spend less, or move out.

      For your investments, you’d still probably want to maintain a worldwide allocation rather than a Europe-only one. As for the S&P500 since 2000 – that is a really unfavorable comparison point since the market was so incredibly overvalued for just that short time. Try the comparison by nudging the date forward just 12 months. Or check out the results with consistent monthly investments since 2000.

      • Jan March 3, 2016, 3:38 am

        It is in the Netherlands, “tax box 3” – http://www.expatax.nl/box-3.php

        Germany is actually a little better with a 25% tax on investment gains (“Abgeltungssteuer”) when realised – so annualy on dividends but only on payouts for valuation gains.

        Got my investments half north american and half european and still feel comfortable with the way to go. Living here has high taxes but many other advantages, like not being a freak if on a bike but actually having separate bike roads (even bike highways in some places), modest weather with low energy bills, very low health care costs, basically free education all the way through college.

        The taxation system makes owning your own place more reasonable as owning property to live in does not fall in that tax box 3 thing, so with starting a family at the moment buying or leaving is a consideration (well, leaving would be to Germany and I guess many Germans laugh at the idea that one goes there due to “low” taxes).

        2000 was when I entered, but I also know that while that sum I invested seemed big back than my
        main investments come from recurring investments out of my salary. Already make well more than I spend which is the main step anyway (lets see if we can keep that with children).

        • Chris March 10, 2016, 3:41 am

          German guy here. I didn’t know there was a proper wealth tax in the Netherlands. That makes Germany look like paradise with 25% on dividends over ~800 Euros p.a. and 25% on realized capital gains.

          So hitch up the caravan and move to Germany :-) Even in major cities real estate is a bargain over here when compared to the rest of Europe.

          • Marcel March 13, 2016, 9:09 pm

            Germany is actually quite good for Mustachians if you are living solely on investment income (and can stand the 9 months of grey sky in central Europe). This 25% tax on capital gains is only an “alternative” tax when your standard tax rate would be higher for your investment income (Guenstigerpruefung). The high individual tax deductions plus things like monthly children’s money (Kindergeld) results in a tax rate of nearly zero/null/nada for a family with two kids and 40k Euro in yearly dividend income. They would produce an initial ~13% income tax (joint taxation) but when you consider the generous children’s money that is nearly zeroed out. As a German living in the US I still prefer the US blue sky, warm beaches and wide open spaces in this beautiful country but in Europe, Germany is better for Mustachians than most other places.

  • Anna March 1, 2016, 2:51 am

    Thanks for addressing the issue I had been hoping you would!

    I’m a single mom living in northern Europe and due to our country’s very good social security system, I’m able to only work part-time (18 hrs per week, occasionally more), leaving me enough time to be with my 2-year old. Leading a rather mustachian life, I’m still able to save about 45 % of my income, including mortgage. When I want to start working more (meaning 30 hrs per week, which you’re entitled to until your kid reaches a certain age), I’ll be able to save 55-60 % of my income. I’m basically trying to optimize my savings and time spent with the kid.

    Finding your site has helped me greatly with my savings rate. From the time I graduated up until a few of years ago, I was troubled by all the extra cash left over from my paycheck. I was used to a fairly modest lifestyle during my studying years but after graduation suddenly felt pressure to “update” my life, including wardrobe, food, hobbies, all of the usual crap. Living with a man who was very spendy didn’t help, either. I really wanted to save but didn’t know how. Stocks seemed too risky and I knew nothing about index funds. So I put away some of the money in a regular savings account, and with the rest, participated in the life update process for a number of years. I never felt good about it, though. It always seemed like I needed to update to yet another expensive piece of clothing, a trip to fancy ski resort or whatever. The result was that I was barely able to save enough for a downpayment of an apartment but wasted thousands on unnecessary stuff.

    But then I got separated, bought my first apartment and at the bank they recommended saving in funds. I bought the recommended funds but started doing more research on the matter, found MMM and a couple of other FI sites, realized that my bank’s active funds were high cost and performing rather poorly compared to the index. So I took that money away and put it in a low cost index fund (that’s right, I currently only own one index fund).

    With the current interest rate of about 1 % on my mortgage and the stock market going down, I’ve been wondering whether I should pay off my mortgage faster (no extra fees on that) or invest more in cheap stocks. I haven’t made up my mind, so depending on my mood each month, I either make an extra payment or buy more low cost index funds. I’m expecting the stock to go down more and as I automatically buy funds each month anyway, lately I’ve been focusing on paying down my debt. I still have a mortgage of a bit over 100 000 dollars. Which would you recommend in this situation?

    • Gina March 1, 2016, 10:56 am

      Maybe go 50-50? 1% is great, but you need to pay down your debt too. Interest bites you in the ass in the long run.

    • Zac March 1, 2016, 12:53 pm

      Is it possible for Americans to immigrate to your country? Which country? I really want to live where you live.

      To answer your question: since your mortgage is at a 1% interest rate, it almost definitely makes more sense to invest your extra cash rather than pay off the mortgage quicker. Think of any money paying off the mortgage as having a guaranteed 1% return. Would you invest in a stock or bond with a guaranteed 1% return? Not likely, as such a return does not even adequately combat inflation.

      • Anna March 2, 2016, 2:27 am

        I agree with both Zac and Gina. I live in Finland, which is a great country in many aspects. Over here University level education is free of charge and students are actually paid student support money about 500 dollars per month minus tax (but they’re currently considering lowering this amount and students are furious about that), health services are mostly high quality and free or very low cost (no private health insurance needed), children’s daycare cost depends on the family’s income but maximum monthly fee is around 280 dollars even if you are a millionaire. In short, even though it’s not perfect, society takes pretty good care of us and I don’t need to prepare for the American cost of living.

        I’m pretty conservative and don’t like having debt so that’s why I’m trying to pay it off as soon as I can under my circumstances. Maybe once I start working and earning more, I’ll go 50-50 (now it’s more like 70 % on mortgage and 30 % in index funds).

      • Chris March 10, 2016, 4:40 am

        I know both sides of the ocean and I’m always laughing at Europeans who just don’t understand that Europe is easy compared to the US. I just learned there is a wealth tax in the Netherlands, but that’s not the case in Germany and that’s where I live with two children (2 and 4). Kindergarten is free. I’m paying the incredible amount of 46 Euros each for a month of lunch in kindergarten. School, high school and university will be free as well. I have 30 paid holidays that I can actually take. My mortgage will be at 1.2% interest until it’s paid off completely. The cost for health insurance won’t change because of my individual health. Germans don’t believe in credit cards and paying cash is common. So you actually feel the pain of spending physical money. And on and on and on.

        And yet everyone around me is in full crisis mode and I just don’t understand what’s going on in their heads. They have absolutely no idea how risky (from a financial point of view) and hard life is in other countries. If you moved here with your standard American “nothing is impossible” attitude beefed up by MMM knowledge and a good entrepreneurial mindset, you could be a millionaire in no time flat. Believe me when I say this.

        I think it’s because European style socialism – as great as it might be – makes you passive and that means as a hardcore capitalist you’re the wolf among a country of chickens. There are so many opportunities that people just don’t take advantage of. As a side gig, I’m currently buying houses in the countryside to fix them up to sell them to Dutch people who are looking for affordable houses with more than 10 sqft of lawn around them. There is nobody doing this in my area. So no competition what so ever. I even showed quite a few people the numbers and pretty much said I found a gold mine and they should get a shovel and dig. They just shrug, go to work in the morning and keep complaining that health insurance got 10 Euros more expensive.

    • Tuomas March 2, 2016, 6:05 am

      Hi Anna,
      Take a look at Nordnet’s Superfonden. This applies to other Scandinavians too. Nordax bank also gives 1.4% interest rate (that’s where I keep a small emergency fund) so comparing to that there is no hurry to pay off the mortgage. Obviously you will not get rich with that interest rate though :)

      Btw. it would be nice to hear any Finland specific saving tips related to kids.

  • Joe Smith March 1, 2016, 2:51 am

    So when do you take returns then? When the market is up? If yes then how much?

    So if the market goes up 20% — do you draw more than the 4% annual retirement money to make up for years like now when the market is down, and you didn’t draw anything?

    • Mr. Money Mustache March 1, 2016, 9:07 am

      Another great question I should write about in a “How to live off a fixed chunk of money” article.

      In general, you never cash out gains as a way of trying to outsmart the market – you just pull money out as you need it.

      I think the traditional way the 4% rule is calculated is this: you start with a snapshot of your assets on the day you retire, and start spending 4% of that annually. You allow yourself raises to keep up with the general inflation rate.

      In real life you could live much more freely and have more fun with it: run a Mustachian lifestyle where optimizing your spending is fun rather than a burden. This means you’ll often beat your 4% income budget as long as you set it conservatively in the first place. But also allow yourself to cash out more when it feels right – a special opportunity for a trip, or to be generous to somebody, or whatever.

      • Jay A. March 6, 2016, 10:37 pm

        I’m not even certain taking a snapshot of assets at retirement is a good idea. If you’re mostly invested in stock index funds, that snapshot reflects the volatility of the stock market.

        As I believe Mustachianisim is more about a way of life, with an investing philosophy as a byproduct or means to an end, I hope the transition from full-time work to a more independent and flexible lifestyle will be more organic and natural. I hope it is not solely or primarily based on my portfolio’s market value on any particular day.

    • Mars Hars March 2, 2016, 11:49 am

      Withdraw your spending money as you need it and rebalance to preserve your preferred ration of stocks versus bonds.

  • Brandon March 1, 2016, 4:23 am

    Maybe I’m missing something, but even when the market is going down, my IRA and 401k seem like a win. I was going to pay 20-25% tax on that money anyway. The markets gotta suck for a few years before I have a real loss compared to giving money to uncle Sam.

    Am I missing something?

    • Vince Granacher March 1, 2016, 2:38 pm

      Nope. And even if the markets suck for a few years (like 2007 to March of 2009), over the long term, you should get everything back and then some. At least it worked out for me from March of 2009, September 2001, the y2k issue, the dot com bust of the late 90’s, the real estate bubble burst of the 80’s, etc. etc.

    • Frugal Bazooka March 2, 2016, 11:07 am

      Brandon, You’re not missing a thing and that fact is why I don’t bother much trying to convince people to invest in the stock market if they are dead set against it. Any of us who are using 401k, 403b or IRA to help build wealth get a positive double whammy of nearly guaranteed gains. Never before in the history of the world (ok, yes I love hyperbole!) has a gov’t tried so hard to create so many programs to help their people get wealthy. Between the mortgage interest deduction and all the assorted education/retirement funds that shelter income and gains, there’s a literal cornucopia of wealth re-distribution that directly benefits the middle class. The real question is why don’t more people take advantage of these amazing programs and the answer is…I have no freaking answer to that baffling fact.

  • Houston March 1, 2016, 5:42 am

    Great article. Thanks, MMM!

    I have read similar advice from JL Collins (and I think Warren Buffett, too). The one point I cannot wrap my head around is how compound interest plays in. Even during the accumulation phase, is it not disavantageous to have down or flat markets that would limit the potential for compounding growth?

    • Paul F March 1, 2016, 1:08 pm

      No, because during those times the money you are investing is buying more shares, as are your reinvested dividends.

    • Daniel March 1, 2016, 1:20 pm

      The price you pay determines your rate of return. Simplified version, you buy a stock for $10. After a year, it rises $10. You have a return of 100%! Now consider the same stock but you paid $100 for it in a bull market. It goes up the same $10 and your rate of return is ‘only’ 10%. You always want to invest with the goal of the highest after tax compound rate of return possible. 10% is nice, but 100% would make you super rich in short order.

  • Lee March 1, 2016, 6:06 am

    I think when trying to grasp the difference between a security risk premium verse a risk free savings investment it is helpful to bring inflation into consideration. In the past decade, inflation in the US has grown pretty steadily around 2%. That means rather than a guaranteed 0.5% growth from the savings account, you are really just guaranteeing a steady loss of value on your investment of around -1.5%. Inflation tracks the purchasing value of money – translated into “Last year I was able to purchase 100 gallons of gas with my $100, but now I can only purchase 98.5 gallons.”

    Some years inflation is much higher, such as 2008, meaning you will lose a lot more, and some years inflation is negative, such as 2009, meaning you will actually create a small amount of value for a short period. In the long run though, you are guaranteed to lose value on your investment.

  • Timarie March 1, 2016, 6:21 am

    Thanks for the post Mr. Money Mustache, I know I am not supposed to freak out when the market does but its harder in practice then it is in theory. I read this post as a little pep-talk not to do anything drastic… Perfect timing!

  • Chris March 1, 2016, 6:51 am

    I definitely see this this downturn as a normal and somewhat welcome occurence. I’m glad I started keeping some of my money in cash last year. Goes against your advice, but even Warren Buffet agrees that cash is the best hedge and noone should have 100% of their money invested this far into a bull market.

  • Chris March 1, 2016, 6:54 am

    Are you at all conerned about the performance of your Betterment accout compared to the index fund? I was interested and skeptical, and ultimately decided not to use Betterment because it seems like a lot of marketing and not a lot of substance. So far seems like a good decision.

  • DA March 1, 2016, 7:27 am

    I invest my small amount of money in individual stocks as well as the ETF. The shares I bought are dividend paying ones. Will it be a good strategy to have shares and ETF?

  • Mr. Frugal Toque March 1, 2016, 7:33 am

    I still have a bit of my RRSP/TFSA money with a local branch of a bank, so I go in every year to meet with an advisor. She’s always surprised, in the bad years, how complacent I am about my losses.
    Some years are good, some years are bad, right?
    But most people freak out, and there’s a vague sense of tension in the air until she realizes that I’m not one of those people.

  • MRog1141 March 1, 2016, 7:33 am

    “pour the rest into those investments (max out the 401(k) first, then IRAs, then put the rest into normal taxable accounts)”

    Hey Pete, don’t forget the HSA for High Deductible Health Plan participants! Tax-free in and out!


    • Ethan March 22, 2016, 7:52 pm

      And tax-free investment earnings and interest.

  • Carlos March 1, 2016, 7:34 am

    Hey Mr MMM; I wonder what could you advise to a brazilian mustachian. Have a look at BOVESPA Index… things can get really, really bad sometimes downhere, even dividends, are not being paid.
    You probably know it, but i havent found you talking about Nassin Nicolas Taleb, on The Black Swan – The Impact of the Highly Improbable, says, to me, that a lot of planning is not the way to be sure….
    Cheers, love your site and your articles.

  • Pengepugeren March 1, 2016, 7:52 am

    If you paiy $100 per hen, you’re paying way to much ;-)

    • Vince Granacher March 1, 2016, 2:41 pm

      Depends on the size of the hen. At 227 lbs, could be a bargain.

  • Joe March 1, 2016, 8:06 am

    Dear MMM, in the article above you cite a hypothetical scenario in which an investor, having worked and invested for 10-15 years could retire once she reached her investment goal of 1 million dollars. You go on to clarify that such a portfolio balance would comfortably provide a $40,000 income if adhering to the 4% rule. However, if it took 15 years to accrue this total, an assumed average rate of inflation of 3% would increase the investor retirement goal value from $1000000 to $1568000. If an investor needs $40,000 per year to live comfortably, in 15 years inflation will cause this value to spike to $63,000. Multiplying this value by 25 to adhere to the 4% rule gives us a portfolio retirement goal value of $1,575000. Have I completely misunderstood this process? It seems as though I am chasing an ever increasing end goal which seems to run in a vicious cycle; the more years it takes me to reach my retirement portfolio balance the greater the necessary balance becomes and greater it becomes the more years it takes to reach. I would like to have $30,000 dollars per year in retirement. If I believe that I can live on $30,000 of today’s money in retirement my end goal today is $750,000. However, if I think it will take me 15years to reach this goal then inflation causes those values to rise to $47,000 and $1175000 respectively.

    • Allen March 1, 2016, 9:45 am

      The compound interest rate of 7% that MMM uses already takes interest into account. So the 15 year, $1M figure is inflation adjusted to current dollars.

    • dandarc March 1, 2016, 10:11 am

      Don’t confuse projections with practice. The short answer to your question is that inflation is baked into the time-estimate (10-15 years at a 60% savings rate), and as is usually the case on MMM the 40K/1M can be thought of as “Today’s dollars”. The nominal amounts will likely be higher in 15 years as you’ve pointed out, but the time to reach 25X current spending is what is important – and the inflation estimate is baked in because that time estimate is based on a “5% annual return after inflation”. See the shockingly-simple-math post – 60% savings rate = 12.5 years starting at 0.

      In practice what you’re really doing each year/month/day is asking “What are my expected annual retirement expenses if I were to retire today – what would I spend next year?” “Do I have 25X that number or more invested right now?” The answer to that second question will be “Yes – I can retire if I want to!” or “No – I need to keep working.”

  • Jerry Gordon March 1, 2016, 8:33 am

    Does the allocation of the Betterment account make up for its greater expense?

    • Mr. Money Mustache March 1, 2016, 9:01 am

      Hi Jerry, you might want to dig into the Betterment article I linked to if you’re into the details.

      But in short: the benefits of worldwide allocation and automatic redistribution are theoretically there (depending on which books you read – it’s a complex subject!) This is part of the goal of my experiment: if we several big relative fluctuations in US vs rest-of-world stocks over time, you would expect a Betterment account to outperform a US-only account.

      On the other hand, I’ve found the tax loss harvesting to be an immediate benefit: the amount harvested in just these first 16 months far is already enough to more than pay my Betterment account’s fees forever if I did the simple calculation right.

      I don’t want to sound like an advertisement: Vanguard has automatic reallocation funds available too, some at lower expense ratios. And many funds and other robo-advisers providers do tax loss harvesting as well. Betterment is just the first one I’ve invested with myself, based on a non-scientific hunch of respecting the people who run and work at the company.

      • TheHappyPhilosopher March 1, 2016, 9:39 am

        One thing to consider. Tax loss harvesting provides an upfront savings, but eventually that money will be recaptured in the form of selling at a higher basis in the future. There is of course compounding of today’s savings, but it is actually not as clear cut as it seems to be. I’ve read a few articles on this and they are confusing to say the least. Bottom line is the benefits of tax loss harvesting may be somewhat exaggerated. In fact, depending on tax brackets and such it may be beneficial to do some tax gain harvesting.

  • Mr. Purpose March 1, 2016, 9:10 am

    What! You mean I have to actually monitor and be responsible for my own portfolio? And I have to individualize my retirement plan and can only use the 4% rule as a guideline to creating that strategy? Pure balderdash. We shall settle this fisticuffs style at high noon. (*sarcasm*)

  • SavvyFinancialLatina March 1, 2016, 9:19 am

    I keep ignoring the general public and investing. It’s little amounts here and there but I know it’s going to add up.

    • DA March 2, 2016, 7:33 am

      I agree with you. I do the same thing. I try to invest whatever is available. It is getting big, one dollar at a time.

  • Nate G March 1, 2016, 9:20 am

    Good reminders! I don’t take issue with any points you make, but I’d like to throw my two nickels in.
    On a macro level, I’m worried about a multi-year plateau in the stock market for a couple reasons.
    1) global growth (and new middle-class entries buying our crap) is slowing
    2) global currencies are down vs. the dollar making our crap more expensive
    3) US companies have been using their cash stash and the low interest rates to buy back their stock keeping prices up and/or flat
    4) The US middle class wage hasn’t kept up with inflation over the decades, and is in fact making less than they were in the 60’s, so I don’t see much growth given that consumer spending (crap buying) is near 70% of GDP.
    5) If and when interest rates rise, and it will have to eventually, borrowing may slow a little, our national debt becomes more expensive, etc. etc.
    I know I’m looking at the short term here, but I don’t foresee much growth in the stock market for the next few years. I’m still investing in the market, but I’m keeping a little more cash on the sidelines as well as buying real estate (good opportunities in our area) as a hedge to my opinions about the economy the next few years.

    • Decebal March 1, 2016, 10:29 am

      While I agree with your overall conclusion on the wisdom of holding some assets out of the market this far into a bull run, your point #4 is very much not correct. Inflation adjusted income in the US is nearly 75% higher than it was in the 60’s.

      • Nate G March 2, 2016, 8:10 am

        While you can have your own opinion, you can’t have your own facts. Regardless of the source – BLS, Pew, etc., the data shows that only the top quintile has seen any significant inflation adjusted wage growth since 1964….so the bottom 80% of workers have flat, of not lower, buying power over 50+ years. This is in addition to these same workers being much more productive and working more hours.
        You may be thinking of the median household income rising given that there are many more 2 income families compared to the 60’s, but that doesn’t change the fact that the middle class wages are buying less and less. http://www.pewresearch.org/fact-tank/2014/10/09/for-most-workers-real-wages-have-barely-budged-for-decades/
        Regardless of any specific single data point, when you add up many macroeconomic indicators, to me they are pointing to a relatively flat stock market for the next 5-10 years.
        I agree with MMM that Shiller’s PE ratio for the S&P 500 which calculates price earnings ratios that are based on average inflation-adjusted earnings from the PREVIOUS 10 years, is one of the best measures of the stock market at a point in time. Currently it’s about 25, meaning $25 invested gets you $1 in earnings….not a great ROI in my opinion. The mean and median are in the 16’s. I’m going to be a little cautious with stocks and seek other investment opportunities with a ROI around 10-15%.

    • Jeb March 4, 2016, 8:33 pm

      I only have 2 cents instead of nickels to spare so my thoughts are short. Who cares if the market plateaus at this level for 5 to 50 years? Companies are making money and dividends are increase. Every single month my portfolio buys more income then the month before whether the overall value is higher or lower.

  • Giovina March 1, 2016, 9:38 am

    I am somewhat reassured by this, as I do believe getting in and investing while the market is low is a good strategy. However, I am feeling a little nervous about my dad. I have been reading a lot about low MERs and index funds being better than traditional mutual funds, and my dad decided to transfer some of his retirement savings into a lower MER index fund at his bank. Since then though, it has dropped quite a bit and I keep hearing about how returns will be low for the next decade. He is in his 50s and may not be able to wait long enough to recoup his losses. I don’t want him to panic and lock in losses, but I would feel bad if my advice costs him a lot of income in retirement. Anything I can do to mitigate this risk?

    • dandarc March 1, 2016, 10:33 am

      If returns are indeed low for a decade, and it is a problem for your dad, that would suck. But it is likely not to be due to switching to index funds – the lower expenses paid means he’ll likely have done better than had he stayed in higher-cost funds.

      That being said, the best way to mitigate this sort of risk is to reign-in spending. The less you need, the less a potential crash or slow decade will affect you. Your social security or other pension will go further.

      You might look at a Single-Premium Immediate Annuity – your dad gives an insurance company a lump sum in advance, and they guarantee a certain monthly payment for the rest of his life. You’re buying a traditional pension. SPIAs are not part of my personal plan, but particularly for folks who might not be great at managing their money, annuitizing a portion of the stash can be beneficial. Obviously, you’d want to shop it, but SPIAs are not nearly as big a ripoff, generally speaking, as whole-life (for example).

      • Giovina March 1, 2016, 12:46 pm

        Thanks for the advice, I’ll have a look into that and see if it would be a good fit for him. I have also been working with him on getting his spending down, as a recent divorce has changed his whole situation. It’s hard though when many costs are locked in as long as he stays in the house, and he’s no longer splitting the bills. Goes to show that you can live a certain way and plan for a certain outcome for your whole life and it can go upside down in a matter of months. At least he has been good at saving and passed that mentality down to me. I just wonder how much more he would have socked away if he hadn’t been paying +2% on his investments for so long.

    • Naners March 3, 2016, 10:18 am

      Holding lower-cost index funds is not the problem. What you need to look into is the mix of socks and bonds that your dad is/should be holding: google “asset allocation” for different recipes for the mix. Generally the proportion of bonds goes up with age. Bonds have lower return but they are less volatile so they protect against turbulence to a certain extent. On this forum you will hear people talk about being 100% in bonds but in my view that’s an advanced strategy. Many people will do best by following the standard advice about mixing stocks and bonds.

  • Justin R March 1, 2016, 9:43 am

    I disagree to some extent. I don’t see any reason why any Countries stocks will always (given enough time) have an upwards trend. To me there is always the risk of things not improving by the time one retires. Personally, I have been using my investments to lower my cost of living (e.g. solar, geothermal,electric cars). This is still risky, but it at least guards me somewhat against not being able to pay my bills if I lose my job. It also makes it harder to spend money frivolously. Beyond lowering cost of living it is very difficult to determine how to invest. I’ve been trying to put money into things that have some intrinsic value (real estate/commodities/etc), but even these have obvious risks.

    Taking this all into account and adding in the fact that there are many people with lots of money to invest who run fancy algorithms to snatch the best deals makes me very leery of any investment.

    Since I am mostly working to retire it makes me question what the best thing to do is. Should I save money and risk all of it being lost (through the market/inflation)? Should I work less and risk running out of money if I get a disability?

    Sorry for the ramblings, but these seem like very mustachian problems and I am quite curious to hear other peoples solutions.

    • Justin R March 7, 2016, 10:14 am

      No one else is worried about hyper-inflation or a several decades long downturn at all?
      I’d hate to work at desk for 30 years only to have the market completely crash the day after I retire.
      I realize there are ways to guard against this (bonds,etc), but these have their own issues (inflation).
      Working just to save seems like a waste of life to me, but there doesn’t seem to be a better alternative

  • rob March 1, 2016, 10:15 am

    If you are selling stocks every year to bridge the gap between dividend income and living expenses, won’t your total stock share count be decreasing? If so, wouldn’t this mean that your next-year dividend could decrease (unless dividend yield was raised)? That would then lead to a larger stock share volume sale to bridge future years’ gaps, correct?

    Seems like a negative feedback loop. What logic am I missing out on?

    • Mr. Money Mustache March 1, 2016, 4:49 pm

      The idea is that both stock prices and the accompanying dividends rise along with economic growth (on average). So as long as the percentage of shares you sell is significantly less than this percentage, you can still have a growing net worth.

    • Jonathan March 2, 2016, 8:08 am

      You are right. Never sell principal unless you absolutely need to do so to survive. Live on your dividends and Social Security, or get a job.

      • Karl hungus March 4, 2016, 6:25 pm

        No he’s not, and neither are you. Selling stock or taking dividends is the same thing.

        • Jim March 5, 2016, 6:01 am

          Correct. Most people don’t understand this,

        • larmando March 5, 2016, 11:26 pm

          Yes and no. That depends on the stock you sell being viable for the amount of growth you count it to grow in the long term, versus it being able to pay the dividend in the long term *only*. And of course on the ability of the dividend to adjust for inflation.

        • lurker March 6, 2016, 10:41 am

          I think I am stupid because they seem different to me and are taxed differently as well depending on how long you have held the shares and whether the price has gone up or down….also once you sell the shares you will no longer get the dividends…are you guys talking about holding just an index fund?….then maybe it is the same….thanks

          • Sugarmountain March 7, 2016, 11:30 am

            Think of it this way, compare two stocks where one pays a 2% dividend and appreciates 5% the other one doesn’t pay a dividend but appreciates 7% a year. If you were to just sell 2% of your holdings of the second stock, the net result would be basically the same, ignoring tax consequences.

            Warren Buffet has setup BRK-A/BRK-B to be the latter, he simply reinvests the dividends for you, instead of forcing you to do a DRIP (dividend reinvestment programe).

            The tax differences are a bit smaller now that dividend tax rates are the same as long term capital gains, but they are still real.

            • Jonathan March 10, 2016, 8:56 am

              Buffett, nowadays, buys whole companies. He gets the entire cash flow, and reinvests it by buying more companies, while an individual investor buying stock would only get the dividend.

              What is the difference between you reinvesting a 4% dividend and Buffett investing a 10% cash flow? You’ll average an 8% return over the decades, while Buffett will average 20%.

  • Steve March 1, 2016, 11:13 am

    Hey, wanted to say I enjoyed your article in the New Yorker magazine this week!


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