Monday Night Finance- Volume 68

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Money ‘Rules of Thumb’ You Need To Forget Right Now

We’ve all heard plenty of money rules. Here are just a few examples:

  • Renting is just throwing your money away.
  • You need to have an emergency fund with more than X dollars in it.
  • Debt is bad.
  • College is always a good investment.

I’m sure we’re probably following many of these rules subconsciously even if we haven’t heard them in a while. But are these rules helping us get to where we want to go? Or could they actually be hurting us? Maybe the rules made sense a long time ago but no longer make sense in the 2020’s. Jim Wang of Wallethacks did a deep dive into some of these rules of thumb and came up with some great reasons you may want to rethink your strategies.

For example, you should always buy the orange properties in Monopoly if you can. You always build the maximum number of houses on monopolies and avoid upgrading to hotels (there is a finite number of houses, when you buy them then someone else can’t).

These rules of thumb exist because of the rules. In Monopoly, the rules don’t change. As a result, the rules of thumb don’t change. If you changed the rules, then the rules of thumb would change. Add a third die and now those orange properties aren’t as attractive. Infinite houses and hotels would mean you should upgrade to hotels.

In real life, the underlying rules change all the time. ~ Jim Wang, WalletHacks

Jim starts off by explaining that rules of thumb can get you into trouble because they are a shortcut. You turn off part of your brain by only following the rule of thumb. If you forget the “why” behind the rule, you can get into trouble when the rules change. Not only are rules of thumb bad because they’re “fixed” even when the rule changes, but they also apply to everyone equally. Think about nutrition- should a weightlifter and an octogenarian in a nursing home be on the same diet? Of course not. So why do we apply basic money rules to everyone. Jim then uses this framework to break some of the biggest money rules of thumb. My favorite one is around emergency funds. While we can all agree that emergency funds are a good thing, not everyone needs to have the same size of emergency fund. Obviously a teenager living with her parents doesn’t need to have $10,000 in a bank for emergencies if she loses her job at a local restaurant. But her parents may need to have a much bigger emergency fund to provide for the family in case they lose their jobs and need several months to find a new job. For even more great examples, check out the article!

When The Stock Market Makes You Cry

We officially reached “bear market” territory this past week. A bear market is typically defined as a 20% drop in a given market index. I should note that the S&P 500, one of the most followed indices, closed slightly above the 20% mark but spent a lot of the day trading below this official definition of a bear market. If you ignore the March 2020 temporary dip in stock prices because of Covid, this is the first bear market we have experienced since 2009. Bear markets are a common occurrence. In fact, our previous bull market was one of the longest runs ever experienced. But if the drop in the financial markets has made you edgy, this article from Banker on FIRE may help you feel better.

One mental trick I often employ at times of market volatility is envisaging where the stock market might be in the future. Some simple math tells me that assuming an 8% nominal return, the S&P 500 will stand at roughly 19,400 in 20 years’ time. At that point in time, it will be utterly immaterial whether you put your money to work when the S&P 500 was at 4,500 vs. 4,150. ~ Banker on FIRE

While you may feel bad about your portfolio, the author of this post decided to invest a large amount of cash ($150,000) into the market in March 2022. Only to watch it get slashed by roughly 10%. Nobody likes losing $15,000. But the author of the post is not worried. The Banker on FIRE invested this money for the long term (~20 years). Given historical returns on investments, he estimates the S&P 500 will be at 19,400 in 2042. At that point, it won’t matter if he bought in at 4,500 vs 4,150. In either way, his investments will have grown.

I lost money in crypto so that you don’t have to!

If you thought the stock market bear market was bad, have you checked the crypto markets lately? During 2020-2021 crypto was in the news weekly for setting new highs. Random meme coins, like Dogecoin became everyday words as people became overnight millionaires. But over the past 6 months, Bitcoin has lost 50% of its value and some meme coins have done even worse. The Shiba Inu meme coin lost 50% of its value in the past month alone. JD Roth, author of get rich slowly, discusses his recent foray into (and out of) crypto in a recent post on his blog.

So many people endorse cryptocurrency, including people who seem to be savvy and smart. Kim’s brother, for instance, is a huge advocate of cryptocurrency. He and his wife have netted tens of thousands of dollars by dabbling in cryptocurrency. (They bought a new SUV with profits from one transaction. So, last fall, I succumbed to the mania. ~JD Roth

JD has always been skeptical of crypto. Unlike stocks, which represent partial ownership in a company, the underlying value of cryptocurrency is hard to value. In fact, owning crypto is only valuable because other people want to own it and there is scarcity. JD describes stocks as being a “positive sum game” because companies are always creating more value and therefore stocks will continue to rise. On the other hand, crypto is a “zero sum game”, ever dollar you make on crypto is a dollar that someone else loses. Also, crypto markets have huge transaction fees which eat away at your gains. Despite being skeptical of crypto, the author got caught up in FOMO or fear of missing out. He decided to put $25,000 into crypto, and once he started to lose money, added another $25,000 to “cost average” it. Needless to say the investments didn’t go well. Check out the article for JD’s final scorecard and his lessons learned from his short run holding cryptocurrencies.