Buying Something? Sleep on It!

One of the reasons I started DumbWealth was to help people take simple actions to live a richer life. While some of my articles might dive into more complex concepts, many are straight-forward and driven by simple common sense. 

Since we all won’t become billionaires, we must learn to make the most of the cards we currently hold in our hand. And that means we need to make everyday decisions that set us on the path to financial freedom. 

Reduced to its essence, this means spending less than you earn. To help accomplish this, one habit I teach people is to delay discretionary purchases. 

“Sleep on it,” I say.

Why? Because it helps us make better decisions.

The brain needs time to process complex decisions. Sleep helps do this, as it’s biology’s way of cutting out the noise. 

Have you ever had a problem that seemed insurmountable, only to have the solution jump out at you after a good night’s sleep? That’s the kind of clarity you need when making purchase decisions. It’s basically the same reason you aren’t supposed to buy groceries when you’re hungry. 

Marketers love it when you aren’t thinking clearly. They want to do the ‘thinking’ for you. They know that you’re more likely to spend your money if you make decisions using your stomach, ego, hormones or emotions. They want you weak and tired so you are more likely to succumb to their influence.

Take back control by delaying your purchases. If you’re in a store and are about to buy a pair of shoes, put them back down, go home and give it a few days. 

Based on my unscientific experience…

…40% of the time you’ll forget about it.

…35% of the time you’ll decide you don’t really need or want to make the purchase.

…15% of the time you’ll find a better deal.

…10% of the time you’ll go back to the store and buy the shoes.

If you do this consistently, you’ve cut your discretionary purchases by at least 75%. Your mileage may vary, but you get the picture.

Half the battle when building wealth is controlling your spending. It doesn’t matter how big your income is, you won’t get rich giving all your money away. Slow down your purchase decision process. This will make it a lot easier to spend less and build wealth.


Beware of 10 Year Fund Performance Data

The Global Financial Crisis of 2008-2009 was a shocking reminder of what risk looks like. Markets around the world plummeted and volatility skyrocketed. The banking system almost shut down and we came close to experiencing another Great Depression. 

Despite the unusual nature of the financial crisis, market declines of 20-50% do occur somewhat regularly. (Another market decline of a similar depth occurred only six years before the 2008 crisis started.)  Consequently, it is prudent to factor in these types of declines when examining the long term market performance track record of any mutual fund or ETF. 

When investment fund companies display returns for mutual funds and ETFs regulators force them to show 1 year, 3 year, 5 year and 10 year returns (or since inception, if the track record is shorter than 3, 5 or 10 years).

Important note: Fund companies are not obligated by the regulatory bodies to show returns beyond 10 years. This means you might not be getting the full picture – especially if the longer track record looks weak.

Until recently, funds with a 10 year track record incorporated the period that included the Global Financial Crisis. The bottom of the crisis occurred in March 2009, so until March 2019 at least some of the crisis was captured. Now that March 2019 has passed, 100% of current 10 year performance data occurred during a bull market. In other words, despite a few market jerks along the way, 10 year data no longer includes a full market cycle and no longer illustrates the full range of what an investor might experience. Current 10 year time series is effectively a case study in the ‘best case’ investing scenario.

Chart 1 illustrates the impact the financial crisis had on long term returns calculations. The bars show the worst 1 year return for the preceding decade. Until recently, the worst 1 year return occurred during the financial crisis (-43%) and was captured in 10 year time series. With the financial crisis dropping off the 10 year time series, you can see the dramatic improvement in the worst 1 year return on the right side of the chart.

Chart 2 shows how rolling the financial crisis (and the worst 1 year return from Chart 1) off the 10 year time series impacted 10 year returns. The spike on the right hand side of the chart coincides with the worst 1 year period falling off the scale. Indeed, average 10 year return has risen from the high single digits to the mid teens.

This is a deceptive representation of long term returns since it is no longer grounded by a bear market – a normal occurrence during a full market cycle.

Chart 3 illustrates how the financial crisis impacted 10 year volatility as measured by standard deviation. Again, you can see how the 10 year volatility dramatically declines once the data that includes the financial crisis rolls off. 

Losing the Global Financial Crisis off 10 year historical data means investors are no longer getting the full view of how a mutual fund or ETF performs during a market cycle. Not only is this misleading with respect to long term risk-return analysis, this potentially has an impact on how investment fund companies define the risk profiles of their products.

Regulatory documents require companies define the risk level of their products. While not perfect, standard deviation is the commonly accepted quantifiable measure of risk. The recent dramatic decline in 10 year volatility will probably mean that fund companies re-rate their funds as lower risk than before. Meanwhile, the fund itself hasn’t changed. This would be like saying a car is safer now because it hasn’t been in an accident in 10 years. Nothing about the car has changed…it is simply operating within a safer environment.

Same car. Same fund. But you can be sure as sh!t that fund companies will use this more attractive data to their advantage when marketing their products. Even fund companies that don’t purposely mislead will still inadvertently do their investors a disservice by under-reporting risk ratings for their products. After all, what company would voluntarily communicate the risk levels for their funds are actually higher than what the regulators force them to communicate?

Now – more than ever – the warning rings true: past performance is not indicative of future performance. And, if you can, try to evaluate your investments using data that captures a full market cycle.


The High Income Trap

Desire is a contract that you make with yourself to be unhappy until you get what you want.

Naval Ravikant

When I was finishing my undergrad (in 2001), I remember thinking a $40,000 salary was a ton of money.

While in school, I made minimal income yet somehow went out on a regular basis. I wasn’t suffering. In fact, that was a great period of time in my life. Still, I imagined the things I could do with a massive $40,000 income.

Soon after graduation, I was earning $42,000. I was rich! Or was I?

Fast forward to today. I couldn’t even imagine how I’d survive on a $42,000 salary. I earn quite a bit more and I fight a constant battle to ensure my finances don’t slide into a black hole.

What do I mean?

Money has a way of vanishing. The more you earn, the more things you think you need. Expectations rise and you can easily find yourself inadvertently living paycheck to paycheck.

Here’s how people rationalize their increased spending:

“I make good money now so…”

“…why not turn the heat up a little higher.”
“…why not move to a bigger house.”
“…why not buy that leather jacket.”
“…why not spend an extra $50 a month on a better car.”

Soon enough, all the extra money generated by a higher salary is eaten up by a new set of automatic monthly bills and discretionary expenditures. Some refer to this as ‘lifestyle inflation’.

This is precisely why many high earners are actually quite broke. In fact, many high earners live precariously close to the edge of bankruptcy because they are so dependent on their paychecks to cover their massive monthly fixed costs.

The true cost of graduating from a Ford to a Lexus, pleather to leather, campgrounds to Paris, a condo to a 3 bedroom detached is economic security and financial freedom. Financial freedom is only available to those who have assets tucked away in savings accounts, investments and real estate.

By spending your surplus you are trapping yourself in a cycle of financial dependency. You are locked into a job you might hate because you need it to make your monthly mortgage payments. This is the ‘high income trap’.

It’s easy to get stuck in this trap. Marketers and advertisers exploit your primal instincts to desire more. Your boss wants you to be up to your eyeballs in debt – that means he owns you. Your friends want you to live paycheck to paycheck because they lack self control and feel better knowing everyone else is just as irresponsible.

Stop. No matter what your income, I suggest you take a moment to look at all your expenses.

Are you spending to fulfill some unnecessary desire? Do the things you spend money on bring you happiness that lasts beyond a couple days?

The trappings of a consumerist society don’t lead to happiness. Keeping up with the Joneses doesn’t lead to happiness. Owning a bunch of stuff doesn’t lead to happiness.

It’s time to cut the crap from your life and start building some financial security so you can actually do what makes you happy.