Sometimes luck gets in the way of us achieving our financial goals. Other times, we get in our own way. Don't make these classic financial mistakes - they have significant long-term consequences to your financial life.

1. Buy into the financial markets during market euphoria and sell out during the middle of an economic downturn: Far too often, people buy high and sell low instead of the often-stated "buy low, sell high" mantra. This has a lot to do with behavioral psychology and cognitive biases. A surefire way to take substantial steps backward in your financial life is to buy stocks (or any other asset) during a boom only to sell during a recession - this will result in capital losses, which are devastating to your financial portfolio. 

2. Keep no cash cushion for the unexpected: Without a cash cushion (often called an emergency or rainy day fund), you'll need to sell less-liquid assets during harsh times for you and your family. Harsh times almost always do come, so neglecting to have a proper emergency fund in place will likely mean you'll end up selling assets at non-ideal times. Non-ideal is a good scenario. In fact, you could end up having to sell during a market correction or a full-blow recession (where asset prices can quickly drop by 50%). You can't afford to sustain such capital losses - having a cushion of money set aside as an emergency fund will protect you from this. 

3. Fail to invest your savings: The first step to building wealth is saving - if you can't put money aside, you're going to have a hard time building real wealth in a sustainable and lasting way. Some people can save well, but they are afraid of investing. These people are often diligent and reasonably hard-working adults who don't like to take perceived risks. What they don't realize, however, is that for the most part, saving alone is not enough - you must invest your money at reasonable rates of return so that it may grow. Without growth, your wealth will only depend on your ability to earn income, and every year your wealth will slowly be eaten away by inflation. 

From time to time and quite often, we find ourselves in need of extra money. Maybe we're paying down some credit card debt or maybe we need a few extra grand in order for us to take that vacation or maybe we need $10,000 more to be able to afford the down payment on the house we want.

Whatever it is that we need, we are lucky enough that living in a capitalist society allows for ample opportunities to earn side money. This isn't easy to do and your success will depend on many factors, including your skills, your grit level, your energy level, and the amount of time you have to devote your side hustle. But, if you're lucky enough to be able to take advantage of some opportunities that currently exist to earn side money, you could very quickly change your and your family's financial picture in as little as six months. 

1. Drive for Uber/Lyft or another good ride-sharing service: Not a great job -- more of a gig in today's parlance -- but an excellent way to make extra cash for a short time if you've got the energy and the drive for it. You could put in a ton of hours and, over the course of six months, take major leaps forward in terms of your financial life. You'll need to have a reasonably new car and be able to pass a background/driving record check. 

2. Charge scooters: Mobile electrics scooters like Bird, Jump, and Lime are taking over city centers and downtowns all over the US and the world. These scooters need to be charged and most companies have set up Uber-like/gig-like approaches where people can charge them overnight for a fee. The pay is not going to be great here - you'll earn a bit of money on each scooter. You'll also need cheap transportation, the ability to stay up for hours at night, and cheap electricity to make this worthwhile. But, if you fit the mold for this, you can earn some extra side cash. This is not a sustainable long-term solution to your money problems - the pay is too little, it requires a lot of energy, and the price of electricity makes it prohibitive for some people. 

3. Start a blog, and do it well: You could always start a blog or a website on some niche topic, write amazing SEO-optimized content, and make money from ads. This is incredibly popular, especially in the US. There are a ton of resources available all over the internet on how to do this. This is a path that will take a while and where your patience will be tested - you'll be spending a lot of time, energy, and some money upfront to build out a good online presence. The key is not to get your hopes up too high about what's achievable.

4. Participate in focus groups or other research groups: A great way to make extra money is by participating in focus groups, research groups, or other such types of surveys. The best of these are in-person. You can search online to find some consumer research-type firms in your area and sign-up - most usually have an easy way to sign-up to receive updates. You'll periodically get updates with requirements (eg. age, type of car you drive, gender, preferences, consumer choices, etc.) and you can sign-up for them. The pay can be pretty solid - you can make a few hundred USD in just a couple of hours (sometimes more and sometimes less). 

5. Tutor: If you're intelligent and have some solid knowledge about a particularly challenging topic (eg. organic chemistry, introductory Calculus, or Russian), you can tutor people and possibly build a sustainable side business that has the potential to generate extra money for you and your family. This is something that will take time to build and develop - starting a tutoring business is, in fact, starting a business, but it's not a business that requires much upfront cost. There are tons of websites online that facilitate student-tutor matching, but you can go the old fashioned route and post fliers up at local colleges, community colleges, high schools, churches, your local library, and other community centers

The above aren't the only ways to make extra money with a side gig. There are plenty of opportunities available to earn extra cash on the side for people who are smart, hard-working, and willing to put themselves out there a bit. Of course, the more skills and education you possess, the easier things will be (eg. charging scooters vs. tutoring differential Calculus), but there's no stopping you from taking a few steps forward in your financial life if you're gritty and willing to put in the work.

Too many people read lists like the one above, but never take a single step - a lot of us seem to just feel good enough searching on Google and reading the list; we too often get complacent and self-satisfied too quickly and don't actually pursue any of the above money-making opportunities. Others are eager to make extra money and change their financial picture, but are too timid to pursue anything out of their comfort zone. Avoid these pitfalls and mental traps - keep moving forward, both financially and non-financially, one step at a time.

Widely propagated on personal finance blogs, YouTube videos, magazine article, and on personal finance-related TV shows is the idea that anyone can get out of debt, save money, and build real wealth as long as they just try hard (both in educating themselves about money and in actually doing what's needed). This idea about personal finance and wealth building is a fiction, however. Not everyone can achieve financial success because financial success and lasting wealth depend, in part, on luck. 
 
In modern Western Civ, people tend not to like to chalk up success (both of the financial and non-financial variety) and well being to luck. But, in many cultures around the world and in many periods throughout history, chance was understood better, and people didn't have as much resistance to accepting how much of a role luck plays in their lives. In finance, as in everything else, luck plays a huge role.
 
Whether or not you have a job that can provide you with enough income depends on so many factors, including whether or not you have skills that will provide value to other humans. To have such skills, you'd have to have gone to school or have developed them through some sort of apprenticeship (an apprenticeship could range from very formal to very informal). Whether or not you had the opportunity to develop skills, then, is at least in part determined by luck. What if you were born in a harsher place, to a more discordant community, or a less well-off family? Would you still be where you are today with a decent/good/great job? Maybe not. Likely not. 
 
Beyond just the skills you possess, your disposition is dependent deeply on genetics and on how the first few years of your life went. Even the desires to save, to read personal finance blogs, to become better, or to move forward with your life may not be entirely yours – you might be lucky to have them, owing them in part to your parents (genetics) or your first few years of life.
 
Can a homeless man build wealth? Can a single-mom work three jobs while dealing with depression and build wealth? Can a crippled veteran who was deeply abused build wealth? Can a devastated black man who has only been taught that the world is dark and harsh build wealth? Can a family from the former Soviet Union whose members (especially the family's leaders) have deeply dysfunctional and ingrained problems understanding how to function in a capitalist society build wealth? Maybe, but it's not that easy. 

A latte-sipping college-educated person with a relatively healthy mind, decent health, a neutral disposition, and without deep financial/family/psychological burdens stands a far better chance than the people described above. When the financial and personal finance media propagates lies about what's possible and what's not possible, they are abdicating their real moral duty in favor of clicks, views, likes, or short-term gain.

People in the investing and financial world fetishize rates of return. Often cited and mentioned in financial articles is financial/investing genius Warren Buffet. Since 1965, Buffet has generated (thru 2017) approximately 21% annually. This is astonishing and deserves both praise and diligent study, but for most people who are in the early stages of their investing lifespan, it isn't relevant or useful. 

The reason it's not relevant or useful for most people who are in the earlier stages of their investing timeline is that a focus on investing rates of return is useless and distracting. It's not the rate of return that matters most for a twenty-something or thirty-something investor. Instead, it's their rate of saving and investing that matters far more.

Barring ridiculously large and deeply improbably investing returns, getting more return won't be as beneficial as saving more. Imagine you have $1000 today, you can get an astonishingly high 50% return, or you can save another $1000 and get a100% gain effectively. If  you've got $10,000, this becomes harder to do unless your income is very high. At $100,000, it's very hard to save an additional $100,000 - you'd likely want to start giving proper focus to investing returns. At $1 million, you'd likely begin to see more gains from investing than from saving. Obviously, these numbers need to be adjusted depending on income, but the core principle remains the same - if you don't have a lot of capital to work with, stashing away more capital is going to be better for you than trying to finesse something with the small amount of capital you do have.

​From a mathematical perspective, those in Finance can clearly show you how not being diversified -- in an economy that allows for diversification -- is not prudent. Why isn't it prudent? Because, for most investors, not having all of their eggs in one basket will prevent them from devastating loss should some baskets break. Baskets break all the time. 

Although diversification is an ancient concept, the modern idea of financial diversification in the context of creating an effective investment portfolio can be attributed to Harry Markowitz. Markowitz published his seminal paper titled Portfolio Selection in 1952. Check it out here, and other places online.

Some investors, however, feel that they don't need this rule. Some investors think the rule, or more precisely, the nature of the world in the investing space, doesn't apply to them. They feel that they know more than the typical investor or investing firm knows - they think they're somehow better at picking stocks or making investment decisions. These people -- and they are everywhere -- believe that they're just different. It's a common thing in humanity, and it might not change.

Everyone thinks about gaining money when they invest, but too often we neglect how important it is to not lose money. Not losing money is so important, in fact, that one of the greatest financial investors in history (and very likely the greatest one alive today) espouses the following as his Rule No 1:
 
Don’t lose money. 
 
What’s Rule No 2?

Remember Rule No 1. 
 
Rule No 2 is obviously meant to be a little humorous, but Buffet is a serious man when it comes to investing and his rules are meant to illustrate a fundamental truth about investing – that truth is that it’s very hard to recover from a loss and that it gets harder and harder the deeper the loss.
 
This is all best illustrated with examples. Sometimes, a good set of examples can do more for contributing to understanding than pages and pages of text. So, let’s go over three examples, each with increasing levels of severity of initial losses. 
 
In each example, we’ll break things down into 3 time periods – Time 0, Time 1, and Time 2:

• Time 0: This is the initial amount you have before you invest – we’ll start out at $1000 for mathematical convenience, but it can obviously be any number
• Time 1: Once you invest and one time period goes by, you end up at Time 1. This works with any time period – it can be a week, a month, a quarter, a year, or many years. For example, if your time period is one quarter, at Time 1, one quarter will have gone by. 
• Time 2: This is just one more time period that has gone by. So, with a time interval of one quarter, two quarters will have gone by when we are at Time 2. 

​With a 25%loss, your $1000 declines to $750 – this represents a one-quarter decline in your portfolio and would obviously be an unwelcome occurrence. Now, let’s take a look at what sort of returns you’ll need to recover by Time 2; let’s see what sort of returns in the subsequent time period you’ll need to make you whole again. 
 
As you can see from the table, a 33.33% gain is required in order for you to recover and get back to the initial $1000. A 10% return, 20% return, or even a strong 30%return in one time period simply won’t do it. 
 
That means if each time period is 1 year, even a 30% return in the year subsequent to your 25% loss won’t be enough. 30% is a solid return. The fact that it’s not enough should be the first hint that getting back to whole is a lot harder than dropping, from a mathematical/percentage perspective. It’s only going to get worse. 

​With a 50% loss, it’s a lot harder to recover. Now, it takes a 100% gain (doubling your post-loss portfolio value) to get back to whole again. If you halve your portfolio, you’ll need to double it to bring it back to its original value. 
 
So, if a time period is one year, you’ll need to double your post-loss portfolio value to get back to your Time 0 initial value. That’s very hard. You’d be far better off having avoided such a decline because it’ll be an uphill climb getting back to baseline again. This is what Warren Buffet’s Rule No 1 points to.

​With a 75%, things get really bad. Now, in order to get back to whole, you’ll need a 300% gain. A 300% gain is the same as quadrupling your money (4x return). As any investor knows, a 300% return is very hard to get – it usually takes years to achieve such returns in a well-diversified portfolio.
 
Let’s think about this some more. As we keep increasing out Time 1 losses by 25% increments, the return needed to get back to whole by Time 2 goes up by way more than 25%. This is based on the underlying mathematics of portfolio returns, but we don’t need to get deep into that here. The above examples should clearly show how each time the loss gets more severe, the needed gain to get back to baseline gets more and more astounding. 
 
If you lose 75% of your portfolio’s value in a single year due to a very severe recession or, far worse, due to investing blunders, you’re going to have to make some incredible returns (300%) to recover. What makes you think you’ll beable to do that? It’ll likely take a number of years and some serious investing discipline to be able to recover in this way. 

​For those that are more mathematically inclined, let’s dig a bit deeper into the portfolio maths. 
 
Let’s assume an initial portfolio value of a – this is your Time 0 value
 
For any portfolio change (decline or increase)  d, where is greater than -1 but less than 1, the portfolio value in the immediately subsequent period (Time 1) will be a x (1 + d)
 
To get back to the initial portfolio value by Time 2, we’ll need to do something to the Time 1 value to get it back to a (which we stated above was our initial value)
 
We can simply divide the Time 1 value by (1 + d) to get back to a – that’s [a x (1 + d)]/(1 + d)
 
Dividing by (1 + d) is the same as multiplying by 1/(1 + d) – that’s the amount, no matter what our initial a is and what the change d ends up being, that we have to multiply the Time 1 portfolio value by 
 
Now, notice that if d is less than 0, 1/(1 + d) will be larger than 1. So, if d is -0.25 (corresponding to a 25% decline in our first example above), then 1/(1 + d) is 1/(1 – 0.25) which is 1/0.75. What’s 1/0.75? It’s 1.3333. That means you’ll need 1.3333 times the Time 1 value – this exactly represents an aprox 33% increase. 
 
Let’s do a 75% decline as in the third example above – now 1/(1 + d) is 1/0.25. That’s equal to 4, which represents a 300% increase over the Time 1 value. 
 
We can see that as d approaches -1 (moving towards a total loss), 1/(1 + d) gets bigger, but by a disproportionate amount. 
 
Can we derive a simple way to see how our 1/(1 + d) factor changes with changes in d? Yes – it’s easy using Calculus:
 
d/dx[1/(1 + d)] = d/dx[(1 + d)^-1] = [-(1 + d)^-2] x d/dx(1 + d) = [-(1 + d)^-2] x (0 + 1)
 
so, the derivative is -1/(1 + d)^2
 
Calculus can be applied to lots of situations to better understand how things change. F
 
We can see that by squaring the (1 + d) term, we’re increasing the effects of both positive and negative portfolio changes. If d < 0, then squaring (1 + d), which will be less than 1, will only make the factor smaller. By making that factor smaller, the entire factor gets bigger because dividing 1 by smaller and smaller numbers makes the result bigger and bigger. 
 
This should be very discouraging – the numbers tell us that negative effects are magnified when we think about the returns needed to recover. 

One of the best ways to calm your anxieties during market turmoil is to track your portfolio over time in a robust and sustainable way. What does that look like? It means periodically and consistently -- on a weekly or monthly basis (daily is too volatile and yearly is too high level to see intra-year fluctuations) – in a way that makes you actually have to engage with your portfolio.
 
This means using software or an app to track might not be sufficient if the app does all of the work for you. One of the best ways to do it is to use an Excel file and simply list your total portfolio value over time, row by row, with each row representing a particular point in time (see example below). 

​What this will give you is something incredible – it’ll give you some perspective. Perspective is an amazing gift, but it isn’t very easy to come by. To get real perspective, there aren’t a lot of shortcuts you can take – it takes time. But, even if you have been investing for years and years, you still likely won’t gain perspective if you don’t track your portfolio but instead mindlessly go about checking it every once in a while without putting its current value in appropriate historical context.  Remember - perspective is earned.

By having some perspective, you'll be less likely to make dumb investing mistakes. When stocks go down severely due to short term market turmoil, you'll have enough historical perspective to understand that markets are volatile in the short term. 

This is useful for all sorts of investors - those that invest in stocks obviously, but it's also useful for investors in real estate, derivatives, cryptoassets, and even fixed income (although fixed income can be a bit more complex because it is exposed to interest rate risk in addition to market risk). 

.Jamie Dimon, CEO of JP Morgan Chase, stepped down from his comments he made in late 2017. In September of 2017, Dimon said that Bitcoin is a "fraud" and that he would fire people who worked for him if they traded in the cryptocurrency.

Many in the cryptoasset and cryptocurrency community were unhappy about such remarks coming form a very senior person in the financial and banking world. Many in the financial world, including Goldman Sachs CEO Lloyd Blankfein, hesitated even during that time in 2017 to make extremely harsh criticism of Bitcoin and cryptocurrency. They didn't make extremely harsh criticisms, but they still criticized it. 

Blankfein said in November of 2017 that "maybe Bitcoin is kind of a bubble" but he also said that "the list of things that are conventional today that I use every day that I thought would never make it is a very long list."

On Tuesday, January 9, however, Jamie Dimon said that he regretted calling Bitcoin a fraud - he added that he feels the "blockchain is real." These statements were likely prompted by various things, including the rise in cryptocurrency and cryptoasset prices since Dimon made that original statement. However, it's likely that pressure on Wall St. to not be the pariah of the crypto world also had something to do with it. Finally, it's possible that Dimon simply took some time to learn more about cryptocurrency and cryptoassets - after that learning he might have a better opinion of the overall technology behind it. 

While many want to look down upon Dimon for going back on his remarks or for not being on the mark back in 2017, this isn't a smart way to think about things. Incentives matter a lot - this is basic economics. Jamie Dimon is the CEO of one of the world's largest financial institutions - he is the epitome of the entrenched establishment in the global financial world. No one who is not naive should be surprised that such a person would make negative comments about something that could potentially disrupt his entire industry - an industry he devoted his life to. Instead, it's promising that he took a step toward setting things right.

You can't save your way to riches if you don't have a big enough income to save just like you can't dig a big hole if your shovel is tiny. Too many people, too many financial websites, too many financial advisors, too many financial shows have for too long advocated saving with a deep lack of attention to the more important sid of the equation: INCOME.

Of course, even if you have an enormous income but still manage to spend it all, you won't build wealth. But that is not at all relevant to what we're discussing here. What we're saying is that there are simple mathematical and physical principles govern the world we live in and based on these principles there's something we know that's true:

the maximum amount you can save is your full income - this would be not possible in most cases it would require not spending anything

So, if you're earning $30,000 a year but are the most magnificent saver in the world, the most you can possibly save is $30,000 but realistically you'll be considered an ultra-saver if you manage to save $20,000 a year. 

Contrast that $30,000 per year example with someone who earns $300,000 a year - clearly that individual has a much bigger shovel and has a lot more room to take advantage of saving. In effect, this person who makes $300,000 can benefit more from saving because the more he/she saves the more they can put away for building wealth up to their income. In effect, if they can spend $10,000 a year like the person in the $30,000 example, they can save a huge pile of money every year and build a lot of wealth. 

People should be focused on saving, but they should equally (if not more intensely) be focused on generating more income for themselves os that they can put more money aside. This is easier said than done and that's the reason most financial resources tend to focus on saving rather than increasing income - everyone simply wants to pick the low-hanging fruit. 

In a job you sell your time and your energy for money - you will never become rich this way because of the inherent restrictions the laws of nature and of physics place upon us all. Entrepreneurship (eg. business, ideation, innovation, etc.) has been one of the few consistent and reasonably moral paths to both moderate and extreme wealth since the industrial revolution. 

Of course, other paths such as crime and political corruption have always existed as paths to wealth for those who were willing to walk on them, but we are only concerned with paths that really add value to humanity and can at least be somewhat considered morally permissible. 

No matter how hard you work and no matter how many hours you work, you will be restricted to the number of hours in a day, in a week, in a month, and in a year. With a job, you are selling your time for money. Your time might be worth little or it might be extremely valuable given your human capital, but you still are selling this finite resource for money. 

The richest people in your towns and cities are generally not people who have jobs. Yes, someone in your city might earn $100,000 per year or maybe $250,000 per year working as a highly-paid individuals in a big corporation, but there are also plumbers, electricians, small accountants, small lawyers, dentists, doctors, programmers/coders, restaurant owners, website owners, that earn $500,000 or $1 million (or much more) per year through their entrepreneurial ability to use their human capital in a way that is not restricted by time. In effect, these entrepreneurs are able to expand the audience for whom they create value both in time and in scope - they can reach people even when they are not working (eg. website) and they can reach many more people (possibly millions) all by themselves. In this process, the create value for a lot of people and they are themselves able to extract a portion of that value as remuneration from themselves without having to rely on an intermediary in the form of an employer. ​

There are 8760 hours in one year. Let's say you work like a crazy person and are able to work for 1/2 of that time. This means you work for 4380 hours in a year. 

That 4380, represents about 84 hours per week without taking a single week of vacation. Clearly, we have an unsustainable situation if the work you're doing is in any way physically or mentally rigorous. 

So, you -- a total workaholic per the above -- are making how much money? Well, that depends on your hourly wage. According to the Bureau of Labor Statistics (BLS), the average private sector hourly wage in early 2017 is $26.19. But you're not an average person - you're making a lot more than average in our example. 

According to the BLS, the highest mean hourly in the US is for anesthesiologists who make about $130 per hour - this is even higher than surgeons, lawyers, doctors, and chief executives. But even then, let's say you make even more than that. 

Let's say you can make $500 per hour consistently for every one of your hours. This is a hard thing to do. Lots of people earn $500 per hour for ad-hoc work - think of a graphic designer who bills for two hours after spending two hours securing a client or a lawyer's billable hours that don't take into account time spent on client interaction or business management. Unlike most, you're able to get paid $500 per hour for your entire 84 working hours every single week of the year. 

So, per the above example, you'll make $42,000 per week

This comes out to $2.18 million per year

Clearly $2 million is a very large amount of money to be earning per year, but think of the fact that even with our truly absurd example where you're working like a machine and earning an extremely high hourly wage, you will still only earn about $20 million in 10 years or $100 million in 50 years. Yes, those are a large amount of money, but they are literally nothing when compared to what some top people in business and entrepreneurship make more than $100 million in a single year. Facebook founder and CEO Mark Zuckerberg, for example, has a current net worth that would equate to earning $4 million EVERY DAY OF HIS LIFE! 

Clearly, the gains Zuckerberg and other extremely rich individuals have earned are not based on income - it would be impossible to sell their time to earn such gains. Instead, they have earned money selling other things such-such as ideas that are not restricted the same way time is. The highest paid salaried people are always making less than the highest paid entrepreneurs because the world is created in such a way that time is restricted while ideas are not - with ideas you can be earning multiple streams of income every second of every day or you might have windfall gains by creating immense value for millions (or even billions of people). It's far more difficult to do this at a so-called job. 

The key takeaway here isn't that it's bad to have a job. The key takeaway should be that you have to lift your head up from the current place you’re at and see things in a broader, holistic, and realistic way. By understanding the inherent restriction, a job places on your ability to earn you might be better able to spot opportunities or even better understand the world. 

Entrepreneurship isn't for everyone - many people will do better at a good job in a good firm. Additionally, although the above discussion was about money, money is not the most important thing in work and shouldn't even be the reason anyone forgoes a job to start a business on their own. There must be something else besides money motivating you if you are to have a chance at being successful in any endeavor. 

The only thing we're trying to portray here is that business and entrepreneurship allows you to escape from the paradigm of selling your time for money - you can escape this paradigm and go beyond the limitations of time and space on value creation that a job places on you. ​

As with almost anything that's generally true, there are some caveats and exceptions. Here, the main caveat is that there are in fact a handful of people in the world who do become truly wealthy through their jobs. These people include the likes of:

• athletic stars - LA Lakers star Kobe Bryant earned about $325 million through salaries alone over this storied basketball career
• highly-compensated CEOs - Google's CEO Sundar Pichai received almost $200 million in total compensation (comprised of a small portion of salary and a high portion of stock awards) in 2016

​Additionally, one might argue that in the above absurd example it was unfair to bring in the likes of Mark Zuckerberg - there are plenty of entrepreneurs who earn less and even more who fail and don't earn much at all. This is all true, but the point did do a comparison of high paid jobs vs highly paid entrepreneurs. In that comparison what we attempted to illustrate this that in entrepreneurship there is inherently little restrictions on earnings - earnings can be so great that they become absurd (eg. $4 million a day for every day of Zuckerberg's life) while job earnings are restricted simply by the laws of nature and the laws of physics. 

A fundamental principle of investing is that rates of return are key - but most people don't really understand their profound importance. Of course, most savers and investors know that the rate of interest they get on their savings or the rate of return they get on their investments matters a lot, but they are too easily willing to give up valuable return to things such as:

• expense ratios: these are the internal fees that are paid for mutual funds and ETFs - they include thing such as:
  • as the administrative costs to run the mutual fund or ETF
  • cost of hiring a manager for the fund
  • brokerage commissions
  • brokerage advertising
• management fees: these are fees paid to money managers for their service; although compensating good managers is key to a good active fund, management fees can be a killer of investment returns because they slowly eat away at the money that can be instead reinvested and used as a seed for further growth
• loads: these are what can be called fees to the broker or to the salesperson - they are the fees paid to get into or out of a mutual fund and could likely be avoided with proper research
• trading fees: trading fees can eat away at your principal and have a significant negative impact, especially for smaller portfolios where trading fees make up a larger percentage of the portfolio
• poor investment choices: choosing investments that are not going to perform well for a variety of reasons such as overvaluation by the market, incorrect market timing, poor quality of management for mutual funds, etc. - even funds with the same goals and risk levels can provide different returns to do these reasons
• too much risk aversion: not investing enough in more risky assets such as equities and instead placing too much money in things such as bonds or savings accounts when the individual's risk tolerance would allow for a more aggressive portfolio mix
• not shopping around: for savings accounts, not shopping around for a good rate of interest can yield to a significant difference in the interest rate for an individual's emergency fund or cash reserve

It's important to note that not all of the above fees are bad - you're paying these for a reason. For example, you want the mutual fund to hire a good money manager - this person will need to be compensated well. You clearly understand that administrative fees are going to exist for mutual funds and ETFs. Trading fees obviously are required so that the brokerage is paid for the service they provide you - this is a small price to pay for being able to enter and exit positions with ease. 

However, you still don't want to overpay. You will not want your mutual fund or ETF to spend excessively on hiring poor-performing managers, spring money on lots of useless advertising, or running thing so inefficiently that the administrative fees are too high relative to similar funds. You'll obviously want to shop around to find a reputable and high-quality broker, but not one that charges excessive fees relative to what's available on the market. You'll also want to be disciplined and not constantly enter or exit positions so you don't accumulate excessive trading fees that will eat away at your capital. Common sense will dictate that even if the fees are reasonable in principle, they could be unreasonable in practice (meaning in amount). 

To illustrate this point well, let's use an example. Examples are often an excellent way to illustrate importance finance principles in ways that are easy to understand - a theory is good but seeing numbers and graphs often allows people to really visualize the concepts being presented and gives the motivation to use the new knowledge they gained. 

Let's start with $10,000 in our example and let's invest that money at different rates of return - the return rates will be from 0% to 8% in intervals of 2%. First, we'll break down the possible rates and understand where you might obtain them:

• 0%: This is the same return you would get by keeping cash under your mattress or in a checking account - you're losing money to inflation here
• 2%: This is the rate you could get a very good savings account currently (although about a decade ago, where 3% to 5% in an online savings account was readily accessible,  2% would be considered a very poor checking account) or in a certificate of deposit (CD)
• 4%: This is a rate you can possibly find in a very long-term certificate of deposit or a conservative bond fund
• 6%: This is the rate you can find on a more aggressive bond fund or a conservative mixed fund
• 8%: This is the rate of return you can find on a large cap fund or a conservative ETF

Now, let's see how $10,000 will grow at each of the above rates of return by taking a look at the graph below. From looking at the graph we can see that the 0% return stays constant throughout with all of the non-zero returns separating from it more and more over time. We can also see that each 2% increase does not bring a proportional increase in the final amount - the increase itself increases over time. 2

The 8% portfolio brings the initial $10,000 to almost $500,000 but the 6% doesn't even reach $200,000. We can say how important even a small increase in return can make over the long term. That 2% difference is sadly something too many investors ignore. It makes sense given the human mind's propensities that a person wouldn't be able to totally and intuitively grasp the importance of even a 0.25% difference in return, but through education, we can see that the small differences end up with very big differences in results. 

How can a 2% difference result in a greater than 50% difference in the final portfolio value? This doesn't seem to make too much sense at first glances - the 2% difference is only 1/4 of 8%, so shouldn't it result in a 25% difference? The maths of finance don't work this way - this is an incorrect way of thinking through it. The way it works is that the 2% you forgot on the first year doesn't stop there - that 2% you would have gained is no longer able to be around in the second year to earn additional return. For example, by forgoing 2% on the $10,000 investment, you forgo $200 in your first year, BUT it doesn't end there - in the second year that $200 would have been working for you t earn a return. The same is true in the third year, the fourth year, and so on. In effect, the person who invests at 8% is able to not only bring along that extra amount every year but to also keep that amount invested and earning. In effect, changes in investment returns compound over time. This is the underlying principal as to why small differences in return can have tremendous impacts in final portfolio value. 

We aren't going deep into the maths here, but you can reference a 2013 article titled "The Arithmetic of Investment Expenses" by William F. Sharpe. The article is accessible to most readers and the title should give you a hint at the complexity of the maths - it's not very complex to calculate nad understand the impact of fees on final returns. 

Next, we'll present another graph - this time with the same $10,000 initial investment but now we'll look at a broader spectrum of return rates (0% to 18%). 

As we did above, let's take a look at how each of the additional returns can be achieved:

• 10%: Ths is the return you can find on a moderately aggressive mutual fund or moderately aggressive ETF - something that doesn't only track large caps
• 12%: This is the return you can find on a relatively aggressive mutual fund focused on growth stocks or small caps or an ETF focused on small caps stocks or unique part of the market (eg. tech)
• 14%: This is the return you might be able to find in a very well-managed aggressive mutual fund or more-risky high-growth ETF over a longer period of time
• 16%: This is return you can find through the application of financial knowledge (eg. valuation, macroeconomic knowledge, and technical analysis) in the markets to purchase either undervalued positions or those that are exhibiting upward momentum - to achieve 16% returns over a consistent time frame as simple "investing and forgetting" is no longer going to be enough to achieve such returns
• 18%: This is a return that only a few people will be able to achieve over the long term and requires both the knowledge discussed above for the 16% return as well as a considerable amount of luck; this return requires a time commitment that will be significant and approach full-time

​As you can see from the graph, the initial investment returns we plotted on the first graph are made to look minuscule here. Although most investors shouldn't expect to obtain returns over 14% over the long term, this graph clearly represents how important every percentage point is to the final portfolio value. 

Finally, to really bring this home, let's go over one more example - this time let's look at two men. One is Benjamin and one is Gerald. Both Benjamin and Gerald invest $10,000 on the birth of their first child - this could be a college fund or a sort of "start of life" fund so that their progeny is financially stable. Clearly, both Benjamin and Gerald are intelligent, prudent, and caring individuals and parents - most people don't do such things. Another thing that's clear is that their children are quite lucky - they have dad's who care enough to put away some money for them at their birth. Both Benjamin and Gerald have $10,000 ready for this investment - they are quite similar in this and many respects. But, let's now see how they're different? 

The strange thing is that Benjamin and Gerald are far more similar than different - in the thing that matter (caring, prudence, planning ahead, etc.), they are clearly quite similar. Their differences, as we'll see shortly, will be quite small and trivial if it wasn't for the outcome those differences would lead to. 

Benjamin takes his $10,000 and invests it in a fund over the course of one year in a series of 24 purchases, once every month. He shops around for a good brokerage - the makes sure they're reputable and reliable but keeps an eye on trade pricing too. Benjamin chooses a long-term growth fund but looks at expense ratios, loads, and the quality of management in order to make sure that he's choosing the best fund for his strategy. 

Gerald takes his $10,000 and invests it in 60 purchases because he is attempting to time the market. Gerald doesn't shop around for a brokerage and chooses the first one he finds. Gerald doesn't shop around for a fund, but instead takes a recommendation from his friend or family member - this fund has the same strategy as Benjamin's fund but isn't managed as well, has a load, and has a higher expense ratio.

Both Benjamin and Gerald leave the money in their account after the first year and never touch it again - they pass it down to their children who also are wise enough to leave it alone and let it grow.  

Take a look at the tables above to see the actual numbers Benjamin and Gerald are dealing with. In effect, Benjamin and Gerald end up with different starting amounts and different return rates (9.75% vs. 7.25) due to their different choices. These small differences made in the first year have tremendous impacts on the final portfolio values after 50 years. While Benjamin's portfolio is valued at over $1 million in 50 years, Gerald's is valued at only a bit above $300,000 - this is approximately a 70% difference. This 70% was a result of about a $600 difference in initial investment and a 2.5% difference in return. Most people would probably ignore these differences, but they are clearly extremely important.

​If you're interested in further reading, below is a paper titled "The Arithmetic of Investment Expenses" by William F. Sharpe - a paper published by the same William Sharpe who created the famous Sharpe Ratio on how fees and expenses can impact the terminal value of a portfolio. 

Compound interest is something we all know about, but not something we fully grasp. Sure, most people in the developed world in 2017 know what compound interest is and what that it's a pretty powerful thing, but few know exactly how powerful it is. There's a rumor that Einstein said something to the effect of "compound interest is the greatest force in the universe." If that's true, he was a smart man. 

So, how can we approach a better understanding of compound interest? There seem to be two possible approaches here:

1. theory + discussion: we can discuss the theory of interest and use math to formulate a better understanding of why compound interest is so powerful
2. examples: we can use an example to literally demonstrate the power of compound interest without the need for anything else beyond observation of the truth of what's being presented

It seems that both are important, bu that the examples always are better in getting the ball rolling. Some examples are so astonishing that students of finance and financial theory are in awe both at the power of compound interest nad the previous disrespect for it. Here is one such example for your entertainment and pleasure. 

Let's imagine 3 scenarios:

1. Ideal: In this scenario, a child is born and money is put away on its behalf starting in its first year of life - specifically, $100 a month (or $1200 a year is put away). This is put away every single year until the child is and adult and is able to take over the savings himself/herself. The savings is always $1200 - although $100 a month isn't much, the amount is never increased by the parents nor by the adult child. The entirely of this individual saving his or her entire life simply consists of $1200 every single year. 
2. Optimistic: In this scenario, the child doesn't receive any savings until he or she reaches adulthood - until he or she is 25 years old. This person is still quite lucky - he or she is willing and able to save money at 25 years of age. In this scenario, the person saves $1000 per month (or $12,000 a year). We're not dealing with serious money here - $1000 a month is definitely doable, but it's a sizeable amount to save for anyone in their twenties. As with the Ideal scenario, this $12,000 per year savings is all that will be saved every year. 
3. Typical: In this scenario, we're now dealing with something typical - a lack of savings until the person is nearing retirement age - specifically the age of 50. Something is not typical in this scenario, however - in this scenario, the individual we're observing is able to save a very healthy $10,000 per month ($120,000 per year). As with the Ideal and Optimistic scenario, this individual has only this $120,000 per year to save. 

So, we've got 3 scenarios here, with each person separated by two main differences:

• the first difference is the age they start saving - they're separated by 25 years each
  • we have it set at 0 years, 25 years, and 50 years
• the second difference is the amount they save - each scenario increases the yearly savings by a factor of 10
  • this means that in the Optimistic scenario, the person is saving 10x more than in the Ideal scenario
  • this also means that the person in the Typical scenario is saving 10x more than the one int he Optimistic scenario and whopping 100x more than the person in the Ideal scenario

So, we know what's different, but what is the same? We have a few things that are the same for the people in all 3 scenarios:

• first, the rate of return they earn on their savings is the same - we chose a reasonable 10% yearly return
  • 10% is reasonably high but less than the often-quoted 12% from most finance texts in order to provide something more conservative
  • a sufficient time horizon is required to shoot for a 10% return - at least 10 years in the market (otherwise a more conservative approach with  lower expected returns preferred)
• second, the retirement age of the three individuals will also be the same - they'll all retire at 65
  • that means they'll all keep saving their amounts as per the above until they hit 65 years age

So, we now have what we need - we have 3 babies born on the same day in the same hospital to different families. Let's take a look at how things turn out for them over the course of their lives. 

We first notice that the baby in the Ideal scenario starts accumulating wealth - although not very much. In the first year, $1200 is saved. By Year 10, however, almost $20,00 has been accumulated thanks to the 10% growth. Another 10 years goes by and by Year 20 the Ideal baby has accumulated almost $69,000 - a very significant sum especially given the fact that the parents have only saved/invested $24,000 over the course of those 20 years. 

Now, let's move to Year 25 - the Optimistic baby is now and adult and is joining the pack here. Unlike the Ideal adult who now has a lot of cash at Year 25 (about $118,000), the Optimistic baby has nothing. However, the Optimistic baby is saving 10x what the Ideal baby is saving - that's $1200 a year vs. $12,000 a year!

So, let's observe these two over time. At Year 30, the Ideal adult has roughly double the amount the Optimistic adult has (that's about $197,000 vs. $93,000). This might seem not astounding unless you realize that the Ideal adult has only saved/invested $36,000 over the course of his or her life while the Optimistic baby has already (over the course of just 5 years) invested $60,000.

Continuing through to Year 50, where the Typical adult finally joins us, we see an interesting situation - the Ideal and Optimistic adults have roughly caught up with each other. Each has about $1.3 million, BUT the astounding part is only revealed when we think about how much each has saved/invested over the course of their lives:

• over the course of 50 years, the Ideal adult has saved/invested just $60,000
• over the course of 25 years, the Optimistic adult has saved/invested $300,000 - 5x more than the Ideal adult

Now, we've got everyone in the game - the Ideal, the Optimistic, and the Typical adults. Let's follow through until 65 - they have 15 more years to save and growth their wealth. 

Catching up with all of them at 65, what do we see? We see a few interesting things, but first, let's start with the numbers:

• Ideal: approx $5.87 billion
• Optimistic: approx $5.85 billion
• Typical: approx $4.31 billion

BUT, let's again sit in awe of the power of compounding by taking a look at how much each saved/invested:

• Ideal: $78,000 total saved/invested
• Optimistic: $480,000 total saved/invested
• Typical: $1.8 million total saved/invested

So, we see that they're all very wealthy, but they've achieved their wealth in very different ways. While the Ideal person barely saved anything throughout their life, the Typical person saved a ton. Digging deeper, we can see that the Ideal person actually saved less in their entire 65 years than the Typical person saved in one single year. This is truly astounding and provides excellent evidence at the amazing power of compounding. 

We can see that time matters a lot. In fact, this example clearly shows that in many cases, time matters more than money. The one who started first finished ahead of everyone and barely had to save anything. The Idel person could have earned $40,000 their entire lives with no raises at all but would still have more money at 65 than the Typical person who had to earn enough from 50 to 65 to be able to put away $120,000 per year (that's very hard considering that savings comes after expenses and after-tax for the most part). The Typical person would probably have to earn at least $400,000 per year to be able to reasonably save that much money - even at that level of income saving $120,000 per year would feel like an incredible sacrifice. 

Take a look at the table below for a rundown of all the numbers. You'll see the age of our group on the left along with the savings rates and rates of returns at the top.