It’s no secret that mortgage lending has hit the skids in recent months. There are considerably fewer borrowers refinancing their existing mortgages and home purchases are still pretty sluggish.
Earlier this year, Black Knight Financial Services said mortgage origination volume fell to its lowest point on record for a February, with records dating back to the year 2000.
But one area of the market is on fire. I’m talking about the $1 million to $10 million loan amount niche, also known as super jumbo. Pretty much any loan officer’s dream.
Despite there not being a secondary market for such loans, banks are more than happy to hand them out to their wealthiest clients and keep them on their books.
After all, they’re low risk borrowers who also happen to have a lot of money. And wealth management seems to be all the rage these days.
15,000 Mega Mortgages Were Originated During Q2
Banks reportedly made more than 15,000 mortgages with loan amounts between $1 million and $10 million during the second quarter in the nation’s top 100 metros, the highest total ever according to CoreLogic.
Additionally, sales of homes valued at $2 million and up increased to the highest level since at least 2006 during the first half of the year.
Surprisingly, this is happening at a time when all-cash home sales are also at record levels, which at first glance seems a little strange.
Back in May, RealtyTrac said cash was used for a record 42.7% of residential home sales in the first quarter of the year, which was up from 37.8% a quarter earlier and 19.1% a year prior.
The rich generally pay all cash as opposed to taking out a mortgage, but the crisis has produced a lot of fire sales thanks to the sheer number of underwater borrowers and foreclosed properties out there, which could explain the high all-cash share.
The Rich Have No Mortgage Limits
Still, the rich always have plenty of options, and with mortgage rates as cheap as they are, and banks desperate to get their hands on their assets, we’re seeing a lot more of these mega loans these days.
Per Bloomberg, the rich are happy to take out low-rate adjustable-rate mortgages instead of being forced to sell their stocks, which also happen to be at all-time highs.
And because they get mortgage discounts for having so much money, the deals are pretty hard to pass up. This explains why guys like Mark Zuckerberg and Buffett opt to take out loans instead of simply paying with cash.
Some of the banks issuing the largest number of mega mortgages say they don’t even have maximum loan limits for such clients. For example, Union Bank and Bank of the West will apparently consider any loan request.
Union Bank said it has originated more than 350 mortgages with loan amounts of $2 million or more this year. And loan requests at BNY Mellon for similar loan amounts have increased 30% this year compared to 2013.
Sadly, this comes at a time when first-time home buyers are struggling to take out relatively miniscule mortgages. Of course, the wealthy have no problem putting down 30% or more, which greatly increases their options and chances of approval.
Warren Buffett is one of my heroes. He’s the second-richest man in the world, yet he lives more frugally than I do. CNBC recently broadcast an interview with Buffett. Naturally, it’s been posted to YouTube. Here’s the show in its entirety (with notes and excerpts I made while watching). [Update March 7, 2018: The show is no longer available online]
As a kid, Buffett would go door-to-door selling chewing gum and Coke. He’d buy six bottles for a quarter, and then sell them for a nickel each. He bought his first stock at the age of eleven. He bought a 40-acre farm at the age of fourteen using money he had saved from a paper route.
Some of his fundamental tenets for investing are:
Patience pays: buy ’em and hold ’em.
Invest in businesses you understand.
Look for businesses with “durable competitive advantage”.
Look for honest, able management.
Buy at a reasonable price.
Buffett notes that students today have a better standard of living than John D. Rockefeller once did. “Really getting to do what you love to do everyday — that’s really the ultimate luxury… Your standard of living is not equal to your cost of living.“
Buffett is happy if he can have a big-screen television, a bucket of popcorn, and sit in his sweats watching Nebraska football games. “The second-richest man on the planet lives the way he invests: simply and without much fuss.” He eats burgers, fries, and cherry cokes. His doctor gave him a choice: eat better or exercise. He chose to exercise.
CNBC: “You’re not one to accumulate a lot of things.” Buffett: “No. Most toys are a pain in the neck.“
Aswath Damodaran, a professor at NYU’s Stern School of Business says: “I think what Warren Buffet embodies is the importance of thinking for yourself, not letting other advisors, other experts, tell you what the right stock to invest in, because they’re coming from a very different place than you are.” In other words: do what works for you!
Buffett hasn’t made a penny off all the products that are pitched using his name. His favorite book about himself is by Lawrence Cunningham, The Essays of Warren Buffet: Lessons for Corporate America. (The same author wrote How to Think Like Benjamin Graham and Invest Like Warren Buffett, which also looks interesting.)
CNBC: “What is the one thing that young people should be doing about money?” Buffett: “I tell them two things, generally. One is stay away from credit cards… The second thing I tell them is to invest in themselves.”
CNBC: “What’s the number one thing you’ve learned from doing business with Warren Buffett?” Business Owner: “Ethics.”
CNBC: “What is the Warren Buffett secret to success?” Buffett: “If people get to my age and they have the people love them that they want to have love them, they’re successful. It doesn’t make any difference if they’ve got a thousand dollars in the bank or a billion dollars in the bank… Success is really doing what you love and doing it well. It’s as simple as that. I’ve never met anyone doing that who doesn’t feel like a success. And I’ve met plenty of people who have not achieved that and whose lives are miserable.”
You can find more information on Warren Buffett at The Warren Buffett fan center.
Have you ever wondered what a 9-figure amount looks like? It’s a sum of money too big to ignore, with a whopping total of 100 million to less than 1 billion. Discover more about this colossal figure and the wealth it represents
When we mention nine-figure sums, we’re talking about a truly astronomical level of wealth. To put it in perspective, nine figures represent anything from $100,000,000 all the way up to $999,999,999.
This figure surpasses the GDP of several small nations. For instance, Samoa reported a GDP of approximately 843.8 million USD in 2021.
Or consider that according to Investopedia, 7-figure wealth is what puts you among the top 0.1% of the wealthiest people on the planet. This means that having nine figures puts someone at an even more elite level, one whose luxury extends far beyond mere financial freedom.
Only a small fraction of individuals or companies globally can boast such immense wealth. However, it is not an unattainable goal. Let’s take a look at some of the strategies you can employ to accumulate substantial wealth while also examining the lifestyles and pursuits of those who have successfully achieved it.
How Much Is a 9-figure Salary?
Table of Contents
A nine-figure income signifies any earnings that flaunt nine digits, starting from $100,000,000 and soaring upwards. To put it into words, we’re discussing one hundred million dollars.
Quite a mind-boggling figure, isn’t it?
It’s like being handed the keys to a kingdom of unimaginable wealth. But remember, this is a sphere occupied by only a select few worldwide.
Their playgrounds? Often, you’ll find them in the tech sector, inheriting vast wealth or expanding an already thriving family business.
Now, let’s delve a bit deeper, shall we?
When we speak of nine figures, are we referring to the lower end close to one hundred million, the middle ground around 550,000,000, or the staggering high end nearing 999,999,999?
So, the next time you find yourself daydreaming about a nine-figure salary, remember this: It’s not just a number; it’s a lifestyle, a testament to extraordinary achievements, and a beacon of exceptional success.
And who knows? With the right mix of passion, dedication, and a sprinkle of luck, you might just find yourself joining this elite club.
After all, isn’t the sky the limit when it comes to chasing our dreams?
Examples of People Who Earn 9-Figure Incomes
Cristiano Ronaldo: A Sports Icon – With an astonishing income of $105,000,000, this celebrated athlete is not just a football superstar but also a nine-figure earner.
Safra A. Catz: Leading Oracle – As the CEO of Oracle, Safra A. Catz’s leadership prowess is reflected in her staggering earnings of $108,200,000.
David Zaslav: The Discovery Dynamo – Captaining Discovery as its CEO, David Zaslav, commands a whopping $129,500,000.
Nikesh Arora: The Palo Alto Networks Powerhouse – As the CEO of Palo Alto Networks, Nikesh Arora’s genius is rewarded with a hefty paycheck of $125,000,000.
Roger Federer: Tennis Titan – This globally recognized athlete proves that sports can indeed yield nine-figure incomes, as evidenced by his impressive earnings of $106,300,000.
Case Study: What Does A 9-Figure Earning Look Like?
Understanding the intricacies of nine-figure earnings can be a complex undertaking due to the lack of universally defined parameters. For the context of this case study, we will consider an annual income of at least $432K as the lower limit for this category. It is worth noting that any figure below this threshold would classify one into the realm of billionaires.
Renowned business magnates such as Warren Buffet and Mark Zuckerberg exemplify this earnings bracket, with annual incomes reported around $51M and marginally less than $50M, respectively.
Reaching the stature of a nine-figure income earner typically necessitates either a substantial inheritance or proprietorship of a prosperous company with diverse revenue channels. The case of Elon Musk serves as a prime example, with his considerable income derived from two distinct sources – Tesla and SpaceX.
Aspiring for this scale of income undoubtedly sets a high bar. However, with the appropriate strategy and relentless determination, it is not beyond reach. Be prepared to tread a path akin to those who have already achieved this feat.
What Is the Potential Monthly, Weekly, Daily, or Hourly Income in the 9-Figure Range?
How Much Is 9 Figures Monthly?
To figure out the monthly income from a massive annual salary, just divide the yearly amount by 12. Keep in mind that this will give you a range of values. But if you want to earn a nine-figure salary, the smallest monthly income would be $8,333,333.33.
$100,000,000 per year / 12 months
= $8,333,333.33 per month
This question might take a different perspective if you’re raking in 9 figures every month. That means your annual income would be at least $1,200,000,000 or even more.
How Much Is 9 Figures a Week?
If we were to divide the 9-figure annual salary by 52 weeks, we’d be looking at a minimum weekly income that could make anyone’s head spin – a cool $1,923,076.9! 💸💼.
$100,000,000 per year / 52 weeks
= $1,923,076.9 per week
While you’re at it, if you manage to rake in a solid 9-figure sum every week, your annual income will soar to a minimum of £52,000,000,00 or maybe even more.
How Much Is 9 Figures a Day?
Want to know how much you can earn daily from a nine-figure income? Just divide it by 365! If you make money every day, your minimum daily earnings would be $273,972.6. That’s your ticket to the nine-figure club!
Here’s the breakdown:
$100,000,000 per year / 365 days
= $273,972.6 per day
Now, let’s say you take weekends and U.S. holidays off. In that case, you’d need to earn around $381,679.3 per day to make $100,000,000 per year. It’s a good goal to aim for if you want that nine-figure salary without burning yourself out.
How Much Is 9 Figures an Hour?
If you’re seeking a nine-figure income from hourly wages, the calculations are slightly different. Just divide your per day salary by 8 hours, and voilà! The minimum number is $47,709.90per hour. This calculation is based on working days – usually 262 days per year in the US.
How Much Is 9 Figures After Taxes?
Achieving a 9-figure income is quite an extraordinary feat, one that is typically reserved for the most successful entrepreneurs, athletes, and entertainers in our society. It’s almost impossible to reach that level through a single salary alone.
Instead, individuals in this income bracket often have multiple income streams, such as investments, business ventures, and other revenue-generating activities.
Calculating the exact tax on a 9-figure income can be a challenging endeavor. Taxes can vary greatly depending on many factors, including location, type of income, applicable deductions, and more. However, it’s safe to say that anyone earning in the 9-figure range will face a significant tax bill.
What Is the Pathway To Achieving a 9-Figures Income?
If you are in pursuit of a 9-figure income, it is essential to have an understanding of the components that fuel this elusive status. What sets apart these high-net-worth individuals from the rest is their capacity to create multiple streams of passive income and capitalize on them.
Here are some tips to help you achieve this milestone:
Acquire Valuable Skills and Experience
The first step towards achieving a 9-figure income is building a solid foundation of high income skills and experience in a high-value field. This could be anything from technology and finance to entertainment and sports. The key is to become exceptionally good at what you do, often necessitating years of dedication, learning, and practical application.
Build or Join a High-Growth Venture
Next, it’s super important to either build or get involved in a high-growth venture. This could mean starting a business with a game-changing idea or joining a rapidly expanding company in a leadership position. The aim here is to use your unique skills and experiences to create substantial value and wealth, which could potentially lead to a massive income if the venture becomes incredibly successful.
Invest Wisely and Diversify Your Income Streams
Who said you can’t have your cake and eat it too? Investing in the stock market, real estate, bonds, and other alternative investments is another way to generate a 9-figure income. It’s important to diversify your portfolio across multiple strategies so that you’re not overly exposed to any one asset class.
Let’s give you an example.
If you’re already running a successful business, consider investing in cryptocurrency or another digital asset class to increase your income streams. This could provide an additional source of passive income that can help solidify your journey to a 9-figure salary.
Equities and Derivatives Trading
The stock market is an incredibly powerful tool that can help you to achieve a 9-figure income. Through equity and derivatives trading, you can tap into the world’s most lucrative markets and make substantial returns on your investments in a short amount of time.
Learning how to navigate this complex ecosystem of risk and reward requires patience, dedication, and a lot of practice. Start by investing in the stock market or trading on a simulated platform to get comfortable with the process before taking it to the next level.
Leverage Networks and Opportunities
Networking is a critical component of achieving a 9-figure income. By cultivating meaningful relationships with influential people in your industry, you can open doors to opportunities that might otherwise remain closed. These could include partnerships, investments, or high-profile job offers that can significantly boost your income.
Jobs That Pay 9 Figures
Earning a nine-figure salary is an incredibly rare achievement reserved for the top echelons of various lucrative industries. Here are some of the highest-paying jobs and industries that can bring in nine-figure salaries.
Tech Company Bosses
Tech company bosses, particularly those at the helm of companies like Amazon, Facebook, and Tesla, are among the highest earners globally. Their compensation often comes in the form of stock options, which can value in the hundreds of millions or even billions when their companies perform well.
Examples include:
Elon Musk, CEO of Tesla ($242.4 billion)
Jeff Bezos, CEO of Amazon ($151.5 billion)
Mark Zuckerberg, CEO of Facebook ($103.4 billion)
Professional Athletes
In the world of professional sports, athletes like Cristiano Ronaldo, Lionel Messi, and LeBron James have managed to secure contracts and endorsement deals that push their annual incomes into the nine-figure realm. These athletes excel in their respective sports and have built strong personal brands, attracting lucrative sponsorship deals.
According to reports, these athletes earned more than $100 million in a single year:
Hollywood Celebrities
Hollywood is no stranger to nine-figure earners. Actors like Dwayne Johnson and Robert Downey Jr., thanks to their roles in blockbuster franchises, command massive salaries. Additionally, they earn significantly from endorsements, producing roles, and profit participation deals.
Media Stars
Media stars, especially those with a strong presence on digital platforms, can earn nine figures. For instance, YouTubers and influencers with millions of followers can generate substantial income from ad revenue, brand partnerships, and merchandise sales.
Hedge Funds & Investment Bankers
Investment bankers and hedge fund managers are some of the highest earners in the financial sector due to their expertise. Some notable examples include:
Ray Dalio, founder of Bridgewater Associates ($19.1 billion)
David Tepper, hedge fund manager ($18.5 billion)
Carl Icahn, founder of Icahn Enterprises ($10.1 billion)
Pop Superstars
The music industry has always been a lucrative field for successful artists. Pop superstars like Taylor Swift and Beyoncé have made fortunes from their music sales, concert tours, and endorsement deals. These musicians not only create hit songs but also build powerful brands that amplify their earnings.
Entertainment (actors, singers, dancers, etc.)
Performers in the entertainment industry, including actors, singers, and dancers, can achieve nine-figure incomes. Successful film actors can earn millions per movie while top-charting musicians make a significant portion of their income from touring. Broadway performers and dancers in high-demand shows can also command high salaries.
Top-notch Business Owners
Business owners, especially those who own large corporations or successful startups, can earn nine figures. This income comes from their business profits and, in some cases, from selling their businesses. Entrepreneurs like Elon Musk and Jeff Bezos have made billions from their ventures.
These careers represent the pinnacle of earning potential in their respective fields. However, it’s essential to note that reaching this income level requires exceptional talent, hard work, and often a good dose of luck.
Are 9-Figures Rich?
When we talk about money, figures, and digits start dancing in our heads. Six figures? That’s quite impressive. Seven figures? Now you’re playing with the big boys. But when we leap into the world of nine-figure incomes, we’re talking about a whole different ball game. It’s like comparing a kiddie pool to the Pacific Ocean!
A nine-figure income means someone is raking in between $100,000,000 and $999,999,999 annually. That’s right. There are more zeros in that figure than in a beginner’s Sudoku puzzle! This income bracket places individuals among the financial titans of the world. To put it plainly, if you’re earning nine figures, you’re not just rich—you’re Scrooge McDuck swimming in a vault of gold-level wealth.
But let’s be real, nine-figure incomes are as rare as a unicorn at a donkey convention. Even some of the world’s wealthiest individuals, like Bill Gates and Warren Buffet, didn’t make their billion-dollar fortunes overnight. It took years of smart decisions, a bit of luck, and probably a few sleepless nights.
And don’t forget, these ultra-wealthy folks aren’t waiting for a paycheck every month. Their wealth comes from various sources, including investments, real estate, and businesses3. They’ve got their fingers in so many pies; they could open a bakery!
What Does a 9-Figure Lifestyle Entail?
Living a 9-figure lifestyle is beyond the realm of what most people could even imagine. It involves not just extraordinary wealth but also the responsibilities and opportunities that come with it. Here’s a detailed look at what such a lifestyle might entail:
Extreme Luxury
A 9-figure lifestyle allows for some of the most opulent luxuries in the world. For instance, consider real estate: billionaires often own multiple properties around the globe. According to a report by Economics Times, the average billionaire owns 4 homes, with each worth nearly $20 million.
Traveling is another area where this wealth is evident. Private jet travel is commonplace among this group. The cost of owning a private jet can range from $3 million to over $90 million, not including the ongoing costs of maintenance, fuel, and crew salaries.
Philanthropy
Philanthropy is a significant aspect of a 9-figure lifestyle. Many ultra-wealthy individuals are committed to giving back to society. For example, Warren Buffett, one of the richest people in the world, pledged to give away 99% of his wealth to philanthropic causes.
The Giving Pledge is another example of this. Initiated by Bill Gates and Warren Buffet, it’s a commitment by some of the world’s wealthiest individuals and families to give away more than half of their wealth to solve societal problems.
Investments
Individuals with a 9-figure income often have vast and diverse investment portfolios. For instance, Jeff Bezos, the founder of Amazon and one of the wealthiest individuals on the planet, has investments spanning multiple industries. He owns The Washington Post, has a venture capital firm called Bezos Expeditions, and invests in space exploration with his company Blue Origin.
Personal Staff
Having a 9-figure income often means employing an extensive personal staff to handle daily affairs. For example, Oprah Winfrey, a billionaire media mogul, reportedly employs a team of over 3,000 staff, including gardeners, chefs, housekeepers, and security personnel.
This level of staffing isn’t uncommon among the ultra-wealthy. After all, managing a 9-figure lifestyle requires a lot of planning and assistance to make sure everything runs smoothly.
Political Influence
The ultra-wealthy have significant influence in politics due to their large contributions to political campaigns and the influence they can wield over policy decisions. This influence can be used for both good and bad purposes, depending on who is wielding it.
However, the effects of political influence by wealthy individuals shouldn’t be underestimated. It can have a profound impact on policy decisions and shape public opinion in powerful ways. This level of influence is not available to everyone, but those with 9-figure incomes typically use it to their advantage.
Privacy and Security
With great wealth comes the need for privacy and security. People with a 9-figure income often invest in advanced security systems, hire personal security staff, and take measures to maintain their privacy.
This isn’t just to protect their money; it’s also about protecting themselves and their families from potential threats. After all, when you’re one of the wealthiest people in the world, there are bound to be a lot of eyes on you.
High-End Experiences
Those with a 9-figure lifestyle often have access to experiences that are out of reach for most. This can range from private concerts with top musicians to exclusive dining experiences with world-renowned chefs.
This level of wealth also opens up opportunities to travel to the most luxurious places in the world. From private island getaways to luxury cruises, the experiences available to 9-figure earners are limited only by their imagination and budget.
The Bottom Line – Making 9 Figures
Taking all of this into account, it is clear that those with a 9-figure income have access to exclusive and luxurious experiences, as well as the privacy and security often associated with great wealth. This level of influence can also be extremely powerful. Therefore, it should not be underestimated or overlooked.
Overall, 9 figures is an amazing achievement and one that requires hard work and dedication. It is often an indicator of success and can open up a world of new possibilities for those who have achieved it.
Regardless of your current financial status, never forget that anything is possible with determination and perseverance! With the right attitude and mindset, you, too, could one day reach 9 figures or more. Start planning today, and remember to take every opportunity that comes your way. With a bit of luck and the right attitude, success is just around the corner.
FAQs – Making 9 Figures
How many words are nine figures?
Nine figures is a term used to refer to incomes between $100,000,000 and $999,999,999. It does not refer to the number of words.
Does anyone make nine figures?
In the United States, a remarkably small number of individuals achieve the remarkable milestone of earning nine figures or more. According to a report by Market Watch, only 205 people in America earn an astonishing sum of over $50,000,000 in wages alone annually.
To put this into perspective, a nine-figure income would be twice the amount of $100,000,000! As a result, the exclusivity of this income bracket is amplified, leading to a limited number of individuals who can boast such astronomical earnings.
What do “figures” mean in money?
Figures is a term used in accounting and finance to refer to digits of numerical values. It does not refer to physical currency or coins. For example, if you have $50,000, five figures are present (50000). This can also apply to other forms of money, such as stocks, bonds, and investments.
What is a nine-figure job?
A nine-figure job is a term used to refer to the careers of those who have achieved the tremendous milestone of earning nine figures or more annually. This could include professionals from various industries such as tech, investment banking, and sports.
These individuals are typically highly successful in their fields and command higher salaries than other professionals due to their extensive experience and knowledge.
What’s the difference between a 9-figure salary and a 9-figure income?
A 9-figure salary is an annual income of $100,000,000 or more. A 9-figure income is a measure of all sources of income that a person has, including wages, investments, and other revenue streams like royalties. This means that a person can have a nine-figure income without having an extremely high salary.
For example, someone who earns a salary of $1,000,000 but has investments of $100,000,000 would have a 9-figure income. This demonstrates why it is important to consider all sources of income when assessing the overall financial health and status of an individual or family.
What is the difference between 9 figures and 8 figures?
Eight figures refer to financial values between $10,000,000 and $99,999,999. In contrast, 9 figures are incomes of $100,000,000 or more. This is an important distinction to make when discussing the wealth of individuals because it shows how much greater the income of a nine-figure earner is compared to someone with eight figures.
For example, someone who makes $100,000,000 in a year would have twice the earnings of someone who makes $50,000,000. This is why it is important to consider figures when discussing wealth and income, as they can provide valuable insight into the financial status of an individual or family.
Is 9 figures a lot of money?
Yes, 9 figures is a lot of money. It is an astronomical amount that few individuals ever reach. As such, it demonstrates the impressive achievements of those who have managed to achieve nine-figure incomes and provides insight into their level of success and financial status.
Listen to today’s podcast with Codie Sanchez and rethink the way you do property management. In this interview, Codie shares what she loves about property management businesses and the three best ways to increase their profitability. Codie and Aaron also discuss the difference between buying a business and buying customers, how to buy a business with no money down, and the one outcome you must avoid when acquiring a new company.
Listen to today’s show and learn:
Walking the walk [4:39]
Buying businesses with no money down [6:32]
Running a property management business [7:51]
Showing business owners the value in a no-money-down offer [9:19]
When you can sell your business for BIG money [14:37]
The three ways to make more money in business [17:21]
The first business deal you should look for [22:45]
Using your unfair advantage when buying a business [25:25]
Buying a business versus buying customers [29:13]
How Aaron bought 1,000 houses [39:08]
Why successful software companies do extremely well [41:00]
One outcome you must avoid when buying a business [43:55]
Codie Sanchez
Codie is the founder and CEO of Contrarian Thinking, with over 2.5+ million subscribers. She is the co-founder of Unconventional Acquisitions, focused on small business acquisitions in the micro-PE space with an emphasis on roll-ups. She runs a holding company of SMB’s below $10M EBITDA focused upon what she calls “boring businesses,” or service-based businesses. She is a former partner at private equity firm EEC, and built First Trust’s $1 billion+ AUM Latin America business. She held leadership positions at Goldman Sachs, State Street, and Vanguard. She started as a journalist where she won the JFK award and Howard Buffett Foundation. She was listed as a 25 Most Innovative Leader in Cannabis, and a Top Female Investor by Forbes. She has an M.B.A. from Georgetown University, a master’s from ESADE and Fundação Getúlio Vargas, and a B.A. from Arizona State University. She sits on the board of Permian Investment, and Magma Partners Chilean Venture Fund.
Related Links and Resources:
Thank You Rockstars!
It might go without saying, but I’m going to say it anyway: We really value listeners like you. We’re constantly working to improve the show, so why not leave us a review? If you love the content and can’t stand the thought of missing the nuggets our Rockstar guests share every week, please subscribe; it’ll get you instant access to our latest episodes and is the best way to support your favorite real estate podcast. Have questions? Suggestions? Want to say hi? Shoot me a message via Twitter, Instagram, Facebook, or Email.
Do you ever have trouble keeping up with when bills are due and paying them on time? Welcome to the club. It can be a challenge for many busy people, but paying bills on time is important. Doing so helps you dodge those pricey late fees and maintain your credit score.
For many people, a solution to this challenge is to set up automatic bill payments. This can be done through an automatic payment system, usually referred to as “autopay.” This means that, without needing to remember any dates, write any checks, or click on any payment links, your recurring bills are seamlessly taken care of.
This can be a game-changer that helps you enjoy stronger financial management status and less money stress. But it might not be right for everyone. As with most financial tools, there are pros and cons to using autopay.
So what is autopay? And how do you set it up? Learn the answers to these questions, along with the pros and cons of autopay, so you can determine whether to consider using this option.
What Is Autopay?
What many people call “autopay” is a scheduled, regular transfer of money, usually monthly. These payments are generally transferred from the payer’s bank account (or credit card) to a vendor, or what is known as a payee.
When you link an account to a particular bill or vendor, autopay usually works over an electronic payment system called ACH.
Autopay is typically set up in one of two ways.
• The first is through the company receiving the payment.
• The second is through a bank’s online bill-pay portal.
When you link an account to a particular bill or vendor, autopay usually works over an electronic payment system called Automated Clearing House (ACH). Sometimes automatic payments are referred to as “ACH payments” instead of autopay. If you were to use your credit card, the recurring payment would simply show up as a charge on your card. 💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure online banking app.
How Does Autopay Work?
Here’s a closer look at how autopay works. When autopay is set up, you are authorizing debits to occur on a regular basis. You will not be responsible for sending the funds. Some people may see this, however, as not being in control of their money.
When autopay is set up, either the payee is authorized to deduct funds from your bank account or your bank will send the funds for you.
You do need to pay attention to when your funds are whisked out of your account. If you aren’t on top of your finances, you could wind up in overdraft and getting assessed overdraft or NSF fees, plus late charges.
Autopay vs. Scheduled Payments
You may hear the terms autopay and scheduled payments used interchangeably but they are actually quite different.
• Autopay means that payments have been set up in advance to happen regularly on a certain date. You establish the date and the frequency and then don’t need to do anything else to transfer the funds on a recurring basis.
• With a scheduled payment, however, you are manually setting when you want a payment to be made and for how much. You can do this regularly, of course, but it requires more effort on your part to transfer funds.
Autopay vs. Bill Pay
Here’s another situation in which you may hear two terms (autopay and bill pay) used interchangeably. There is a slight difference, however.
Bill pay refers to the process in which your bank initiates payments from your account to the payee. In other words, the payee is not authorized to go in and deduct the money; your bank is instead providing this service.
Setting Up Autopay
Here is some more detail on setting up autopay so you can have your bills taken care of more easily.
1. Looking at Vendor Requirements
You can think of autopay as either pushing money from your account to the vendor, or the vendor pulling money from your account.
Many vendors require you to set up autopay through their website, so your first step may be to look into their requirements. If you are currently receiving a paper bill, they often include instructions on where you can go online to set up autopay — looking there is a good place to start.
For example, if you have a $1,800 monthly mortgage payment, you may be able to provide your mortgage company with your checking account information (such as your bank account number and routing number). They can pull the money for payment automatically. This is the “pull” version of automated payments as the vendor is pulling the money out.
2. Choosing the Day Your Payment Is Made
You generally get to choose the day that the payment is made — you could consider doing this a few days before the bill is due. This should give the automated payment time to move through the ACH system, including when the due date lands on a weekend.
Also, you’ll likely want to be cognizant that you aren’t setting up any automatic payments until you’re sure that any necessary deposits are made. For example, if you need your paycheck to cash before making a rent payment, making sure to give your paycheck at least a few days to settle in your account may be the pragmatic choice. Or you could see if the payee is willing to move your bill’s due date slightly to better accommodate your needs.
Setting Up ACH Payments
Another potential option is to set up an ACH transfer through your bank; this is the bill pay option mentioned above. Doing this typically requires logging onto your bank account’s website and navigating to the bill pay section.
If you go through your bank, you may need to provide them with the information for the vendor, such as the account number and mailing address. You can usually find this information on your bill or monthly statements.
Using the same example as above, you would enter the information for your mortgage lender into your bank’s bill pay portal. Similarly, the money would be sent via ACH on the date you’ve picked to send the money to the vendor.
You may want to consider selecting a date a few days prior to the due date to avoid a late payment. This is the “push” method of automated payments as you are pushing the money out of your account to the vendor.
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Pros and Cons of Autopay
Autopay can be a wonderful tool for many people looking to simplify their finances. But it won’t be for everyone. Here’s a look at some of the pros and cons of using autopay.
Pros of Autopay
Consider these upsides of autopay:
Convenience: Gone are the days of sitting down to write a check for every last outstanding bill. In fact, these days you don’t even need to log into a computer every time a bill comes due. With autopay, you can pay all or most of your bills without lifting a finger.
This means no more having to log online to pay bills while you’re on vacation or busy with work or family. There is something beautiful about the convenience of the “set it and forget it” method to financial management, if you can make it work.
Improving Your Finances: We don’t need to tell you that it is a smart idea to pay your bills on time.
Not only can autopay help you to avoid frustrating late fees, but taking care of your bills right away may help you to avoid agonizing or allowing it to take up precious room on your to-do list.
Paying your bills on time may help your credit score.
Also, paying your bills on time may positively impact your credit score. Currently, debt payment history is the single biggest factor in terms of determining your score. It makes up 35% of a FICO®️ Score.
That means that paying debt-related bills, such as a mortgage, car loan, or credit card bill, on time, could potentially positively impact your FICO®️ Score.
Learning Good Behavior: If you can take the philosophy behind automatically paying your bills and apply it to your savings strategy, this may help your overall financial success. Just as you can automate the payment of your bills, you can automate your savings to retirement and other savings accounts.
If you don’t automatically set money aside, it can be far too easy to spend the money that lands in your checking account. Warren Buffett famously recommended that people “spend what is left after saving, do not save what is left after spending.”
Other ways to use automatic payments? Pay down debt aggressively or save for your future (even beyond a 401(k) if you have one). In either of these scenarios, you could simply set up an automatic transfer of funds as you would with autopay, but direct the funds toward your financial goal.
That way, the money is whisked from your checking account before you’ve even had the chance to consider spending it.
Potentially Saving Money: Vendors and service providers want to get paid on time. Therefore, some vendors or service providers offer a discount for customers that set up autopay, which could save you money.
For example, you may receive an interest rate discount if you set up autopay for a loan. Other vendors may provide a discount on their product or service if you use autopay.
Recommended: Understanding ACH Transfer Limits
Cons of AutoPay
Now, for the potential downsides:
Possible Overdraft Fees: If there isn’t enough money in your account to cover a bill, an ill-timed automatic payment could cause your account to overdraft. According to the FDIC (Federal Deposit Insurance Corporation), overdraft fees can average $35 a pop, depending on your bank.
You’d need to be especially careful if you leverage multiple checking or savings accounts with fluctuating balances or tend to keep your account balance close to zero. In the latter situation, you might benefit from keeping a cash cushion in your account.
Late Fees: Consider the transaction time when setting up your autopay in order to avoid annoying late fees. Late payment fees will vary by vendor but could be costly.
While giving yourself, for example, a four-day buffer could be a good start, it’s important to check with each vendor to determine their recommended timeline. Finally, after you’ve set up autopay, monitoring payments during the first few months to be sure they happen on time can help ease the transition.
Potentially Reinforcing Bad Habits: For some people and in some specific cases, it may not be a good idea to have your finances on autopilot. For example, those who are actively paying off credit card debt may want more control over how much they pay towards their debt each month.
There is almost always an option to autopay the “minimum payment” on a credit card, which may be tempting. There is no penalty when you pay the minimum payment, so it is certainly better than doing nothing.
But, it is much better to pay off the balance in full, if possible. When you do not pay the balance in full, the card will accrue interest, costing you money over time.
If you aren’t at a place where you can pay off the entire balance quite yet, you may want to try and set your autopay for an amount that’s more than the minimum payment so you can make progress on the balance. (And you may want to try to stop using your card in the meantime if this is the case.) If this won’t work for you, you may want to remain in manual control of payments.
Paying for Things You Don’t Need: Subscription services are sneaky. Amounts may seem small and you hardly notice them on a monthly basis, but they can wreak havoc on your annual budget. It is too easy to forget that you are paying for something, especially when you don’t use the service.
If you take advantage of the perks of autopay, don’t forget to reassess your subscriptions every few months to determine whether you actually need the thing you’re paying for. One example: You might not realize how much entertainment you are signed up for, and could save money on streaming services by dropping a platform or two.
Potentially Less Monitoring of Your Accounts: One issue with using autopay could be that you develop a sense of false security that your personal finances are running just fine. You might not check in with your money and review your spending as often as you might. This could have a negative impact. How often should you monitor your checking account? For many people, a couple or a few times a week is a good pace. 💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.
Should You Use Autopay?
The digital age can be confusing and overwhelming, but this is one case where it may help to simplify our lives. Managing money can be a tedious task, and paying bills is just one part of it.
By streamlining the bills portion, you may find that using autopay gives you more freedom to focus your attention on other financial goals.
That said, autopay won’t be right for everyone and in every circumstance. For example, autopay might not be a great idea for those who haven’t organized their bills and tend to overdraft their accounts. It may not make sense for someone who is between jobs or out of work.
Autopay could potentially be difficult to manage for freelancers or other workers with variable income throughout the month. Ideally, a person would have some cash buffer for bills in any of these scenarios, but that is not the way it always works out in the real world. 💡 Quick Tip: When you overdraft your checking account, you’ll likely pay a non-sufficient fund fee of, say, $35. Look into linking a savings account to your checking account as a backup to avoid that, or shop around for a bank that doesn’t charge you for overdrafting.
The Takeaway
Autopay can be a convenient way to get your bills taken care of with less time, energy, and stress. However, in some cases, it can have its downsides, so it’s wise to know the pros and cons and continue to monitor your money carefully if you do sign up for autopay.
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FAQ
What should you not put on autopay?
It can be wise not to put bills that fluctuate on autopay. You are less likely to wind up with an overdraft situation that way. For instance, if your energy bill is usually $100 a month but goes up to double that during the winter or summer, that might throw off your personal finances if you autopay your bills.
When should I set up autopay?
It can be wise to set up autopay when you are familiar with your finances and cash flow and feel confident that automating your payments won’t lead to an overdraft situation. You might also consider signing up if there is a bonus or perk for you, such as a discount or a lower interest rate.
Why do people not use autopay?
Some people do not feel comfortable with autopay; they would rather be in control of making payments individually and maintaining that control over their finances. Also, some people may have bills that fluctuate considerably and they may therefore prefer to pay manually to avoid overdrafting.
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In 1973, Burton Malkiel published A Random Walk Down Wall Street, in which he argued that a blindfolded monkey could pick stocks as well as a professional investor. Though I bought a copy of Random Walk for $3.99 at the local Goodwill last year, I haven’t read it. It looks dense. I know it’s written for the layman, but it still seems rather academic.
In 2003, Malkiel published The Random Walk Guide to Investing, “a book of less than 200 pages in length that boils down the time-tested advice from Random Walk into an investment guide that [is] completely accessible for a reader who knows nothing about the securities markets and who hates numbers.”
Several patient GRS-readers have been recommending this book for the past year. When I stayed home sick yesterday, I finally found time to read it. I’m impressed. Malkiel has produced an easy-to-read straightforward investment guide that I’m happy to recommend to anyone. His philosophy matches my own:
The advice in this book is both simple and realistic. There is no magic potion in the investment world because the truth is that one doesn’t exist. There is no quick road to riches. And if someone promises you a path to overnight riches, cover your ears and close your pocketbook. If an investment idea seems too good to be true, it is too good to be true. What I offer are ten simple, time-tested rules that can build wealth and provide retirement security. Think of the rules as the proven way to get rich slowly.
Malkiel’s rules are familiar. We’ve discussed most of them here before:
Start saving now, not later. Don’t worry about whether the market is high or low — just begin investing. “Trust in time rather than timing,” Malkiel writes. “The secret to getting rich slowly (but surely) is the miracle of compound interest.”
Keep a steady course. “The most important driver in the growth of your assets is how much you save,” writs Malkiel, “and saving requires discipline.” To develop discipline, the author recommends that you learn to pay yourself first (invest before anything else, even paying bills), implement a budget, change spending habits, and pay off debt.
Don’t be caught empty-handed. Malkiel recommends that readers open an emergency fund. He doesn’t specify how much should be set aside, but he does cover a variety of places to put the cash: money market accounts, certificates of deposit, and online savings accounts. He also recommends purchasing term life insurance.
Stiff the tax collector. Make the most of tax-advantaged savings: Open an Individual Retirement Account, contribute to your company’s retirement plan, take advantage of tax-free savings for your child’s education, buy your home rather than rent. All of these things help to reduce the bite that taxes take out of your money.
Match your asset mix to your investment personality. Based on your risk tolerance and your investment horizon, choose the best mix of cash, bonds, stocks, and real estate. (Malkiel encourages investors to buy each of these through mutual funds.)
Never forget that diversity reduces adversity. Don’t just buy stocks — buy stocks, bonds, and other investments classes. Within each category, diversify further. And don’t just buy one stock — buy mutual funds of many stocks. (Malkiel makes his case with the stark example of a 58-year-old Enron employee who had a $2.5 million 401k — of Enron stock. When Enron went bust, the employee not only lost her job, but her retirement savings vanished completely.) Finally, the author recommends “diversification over time” — making investments at regular intervals using dollar-cost averaging.
Pay yourself, not the piper. Interest and fees are drags on your wealth. “Paying off credit card debt is the best investment you will ever make.” Avoid expensive mutual funds. “The only factor reliably linked to future mutual fund performance is the expense ratio charged by the fund.” In fact, the author advises that costs matter for all financial products.
Bow to the wisdom of the market. “No one can time the market,” Malkiel says. It’s too unpredictable. Professional money managers can’t beat the market, financial magazines can’t beat the market — nobody can beat the market on a regular basis. The best way to earn consistent gains is to invest in broad-based index funds. It’s boring, but it works.
Back proven winners. After Malkiel has preached the virtues of index funds, presumably converting the reader to his religion, he spends a chapter suggesting possible index funds and asset allocations.
Don’t be your own worst enemy. Malkiel concludes by admonishing readers to stay the course, warning them against faulty thinking. He discusses the sort of money mistakes I’ve mentioned before: overconfidence, herd behavior, loss aversion, and the sunk-cost fallacy.
Ultimately, Malkiel’s advice can be stated in a few short sentences: Eliminate debt. Establish an emergency fund. Begin making regular investments to a diversified portfolio of index funds. Be patient. But the simplicity of his message does not detract from its value. The Random Walk Guide to Investing is an excellent book because it sticks to the basics:
It’s short.
It’s written in plain English — there’s no jargon.
It’s easy to understand — concepts are simplified so the average person can grasp them.
It’s filled with great advice.
This book refers often to other books to bolster its arguments, and includes quotes from financial professionals like John Bogle and Warren Buffett. Though the advice may seem elementary, it’s advice that works. If you want to invest but don’t know where to start, pick up The Random Walk Guide to Investing at your local library.
If you’re a U.S. homebuyer waiting for a return to super-low mortgage rates, don’t hold your breath.
The short-lived era of 3% interest rates for 30-year fixed mortgages is over, and unlikely to return anytime soon — perhaps for decades — says Lawrence Yun, chief economist at the National Association of Realtors.
“One can never truly predict the future, but I don’t see mortgage rates returning back to the 3% range in the remainder of my lifetime,” he says.
That’s because average 30-year fixed mortgage rates of 3% or less were an anomaly related to the pandemic, lasting from about July 2020 to Nov. 2022. Historically, the rates have been closer to an average of 7% over the past 50 years, according to Freddie Mac data.
Why super-low mortgage rates won’t return any time soon
Historically low mortgage rates during the pandemic were “an exceptional measure, during exceptionally uncertain times,” says Yun.
With the pandemic came economic uncertainty not seen since the 2008 financial crisis. Fearing a prolonged recession, the Federal Reserve followed the same playbook it used in 2008, pumping money into the economy to stimulate growth.
As was the case in 2008, the Fed slashed interest rates to nearly 0%, created emergency lending programs and bought government bonds and mortgage-backed securities, otherwise known as quantitative easing.
Since mortgage rates are closely linked to the Fed’s benchmark interest rate and can be driven further down by quantitative easing, the interest on mortgages subsequently hit rock bottom at 2.67% in January 2021.
Congress also passed trillions of dollars in Covid-19 relief and stimulus spending, which helped increase U.S. national debt by roughly 30% between 2020 and 2022, according to Treasury Department data.
However, unlike 2008, the economy recovered quickly and rising inflation soon became a problem. By spring 2021, the year-over-year inflation rate had accelerated beyond the Fed’s benchmark of 2%, forcing the central bank to start raising interest rates again. And with that, mortgage rates rose too.
I don’t see mortgage rates returning back to the 3% range in the remainder of my lifetime.
Lawrence Yun
Chief economist at the National Association of Realtors
As a result of inflation and current federal spending deficits, Yun doesn’t think the Fed is likely to drop interest rates down to nearly 0% again, even in the event of another financial market panic or pandemic.
Other economists who spoke to CNBC Make It agree that homebuyers shouldn’t expect a return to record-low mortgage rates in the near term.
“It’s unlikely that the Federal Reserve will respond with the same breadth and aggressiveness like it did in 2020, as the very low mortgage rates in 2020 were caused by very unique circumstances” related to the pandemic, says Abbey Omodunbi, senior economist at PNC Financial Services.
“I haven’t seen mortgages that low in over 30 years in the business,” says Dottie Herman, vice chair at Douglas Elliman. “It’s highly unlikely we’ll see rates that low anytime soon.”
Where mortgage rates are headed
The current average mortgage rate for a 30-year fixed-rate mortgage is 6.81% as of July 6, slightly lower than its November peak of 7.08%, per Freddie Mac data. (Check out this list of the best mortgage lenders here, from CNBC Select.)
However, many projections are expecting a steady decline over the next year or so.
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This is a guest post from John Forman from The Essentials of Trading. Forman is the author of a book by the same name. He has been a trader of the stock and other markets for over 20 years, and is a professional stock market analyst for Thomson Reuters.
The wealth building potential of the stock market is enormous. I think we all realize that. The long-running debate, though, is whether one is better off investing in individual stocks (or funds that do just that), or whether it’s best to just put your money in an index fund. Most funds fail to beat the market, so it would seem index funds are the better choice.
While it is certainly true that index investing has some advantages, and some mutual funds do perform better than the indices, no index or fund will ever offer the upside potential of investing in individual stocks. It’s a matter of math.
Indices and funds include many stocks which move in all different directions. One of those stocks could double in price for the year, but because most others in the collection will do much less well, the index’s or fund’s performance will be much lower than that one stock’s gain. An investor who held that stock by itself, though, would have done quite well.
Of course you need to be able to find the stocks that will beat the indices and funds.
How Do I Find Good Stocks? The requirements for success in the stock market are much like the requirements for success in any other undertaking. Proper preparation is one of them — potentially the biggest — and a major part of preparation is having a firm objective in mind. As an investor, that normally means either seeking capital appreciation or pursuing income, or some combination. For the purposes of the discussion here, I will focus on the capital appreciation.
Another part of the equation is timeframe. I’m not talking about how long you have to retirement. There’s plenty of literature in financial planning circles about how you should structure your investments from that perspective. What I’m referring to here is how long you will expect to hold any given stock position in your portfolio.
Are you a patient long-term buy-and-hold investor who will have no problem sitting through the inevitable ups and downs of the market? Or are you someone who wants more action, doesn’t have the patience to hold stocks for years at a time, and/or cannot stomach the idea that at points your positions could go well against you for long periods of time?
You may not always be one or the other. It is, however, important to know which mode you are in when you are looking to pick good stocks. A lot of stock market players get themselves in trouble because they go into a position thinking they are one type of player only to change their minds once prices start moving.
Fundamental Analysis If you are in the first category, then your focus in trying to find good investment stocks is to look at the big picture. You are Warren Buffett. You look at the company and its management team. You look at its business and, in many cases, the broader economy. What you are trying to identify is a company which will steadily increase in value over time.
How do you do that? By thinking about what it takes for a company to grow and profit in a sustained fashion.
What do companies like that have? They have strong management teams who know what they are doing, who have a long term view and who aren’t worried about the quarter-to-quarter results or stock price fluctuations. They are in growing business sectors (or niches) where the competition isn’t so intense that no one can really make any money.
This sort of approach to looking at companies is generally referred to as fundamental analysis. Fundamentals are the underlying elements that determine the long-term growth and profitability of a company.
The idea is that you are giving your money to some really capable people and having them put it to good use in their business. Then you let them do their thing in the way they best see fit. So long as they continue to do good things and keep the business on track for positive growth in value, you stay invested. Maybe somewhere down the line you will cash out your investment. Maybe you’ll leave it to your kids or donate it to charity. Whatever the case may be, you would expect the value of your stake in the company to have grown nicely in value by that time.
Security Analysis by Benjamin Graham and David L. Dodd is the classic text for stock market fundamental analysis. You can also find a brief overview at StockCharts.com.
Technical Analysis Now, if you are in the second category where you’re not just going to buy a stock and lock it away, you need to think more specifically about your holding period. By this I don’t mean to imply that you will hold a stock for an exact period of time and that’s it. I just mean you should have an idea of how long you would expect to be in the position. That could still be years, or it could be months or weeks.
The advantage of the long-term investor is that they need not worry about the fluctuations in the price of the stock. They are investing on the basis of the long-term growth of the company with the assumption that the stock price will generally follow along at about the same pace.
Less long-term players (often referred to as traders) have to be cognizant of the intermediate and shorter-term price action. Generally speaking, the shorter your expected holding time horizon, the more you will have to focus on the price action. This is because the fundamentals mentioned above are usually slow moving elements which play out over the longer timeframes. They don’t change quickly, so they can’t really influence short-term price movements much.
What I mean by that is stock prices can move in the short-term on a great many factors. It could be news, economic data, changes in interest rates, the general market environment, and lots of other things. Just because a company is making money hand over fist doesn’t mean the stock price will be rising. If the company continues to do that, the stock will probably move higher eventually, but in the meantime other factors could cause it to go sideways or to even fall. This is something that baffles a lot of new investors.
Focusing mostly on price moves you into the realm of technical analysis. This approach seeks to identify patterns of price movement in the market for the purposes of determining likely future direction. This is also referred to as market timing, which basically means seeking to define good points at which to buy and sell. A lot of stock investors use fundamental analysis to find good companies, then use technical analysis to try to pick the best time to buy the stock.
Technical Analysis of the Financial Markets is widely considered the ultimate source on the subject. StockCharts.com offers an introduction to technical analysis.
Value Investing To this point you’ll notice that I haven’t used the term value investing yet. Many people would refer to Warren Buffett as a value investor, and as such would put value investing in the long-term investing category.
Value investing need not be a “buy it and bury it” type of approach, however. In fact, I’d guess that most people consider it the process of identifying stocks trading out of line with the value of the company in question. They use any number of metrics to determine what a company’s stock should be worth. If the stock isn’t close to that value, they will either buy it or sell it in expectation that it will eventually get back in line. In most cases, once that happens, the stock position will be exited.
This probably all sounds very familiar. You’ve no doubt heard of Wall Street analysts putting out price targets and ratings and such. They generally use fundamental analysis to come up with what they think is the value of the company right now (adjusting it for new information, of course). Then they look at current price to see how it matches up with what their valuation calculations tell them.
If you’d like to learn more about value investing, consider Benjamin Graham’s classic, The Intelligent Investor. The Motley Fool has an interview with Bruce Greenwald about the three steps of value investing.
It Takes Work Regardless which type of stock market player you are, there are no approaches which don’t require effort on your part to pick the good stocks. Even if you have someone giving you recommendations, you should still be doing your own due diligence to see if they really fit in with what you are trying to do in the market.
Also keep in mind that no matter what timeframe investing/trading you do, you should always take the longer-term view. It’s extremely unlikely that any one stock position is going to make you rich in a short period of time. If you try to score it big on any one trade you’re probably going to end up losing a lot of money. Wealth accumulation in the markets is best sought by steady growth, putting the power of compounding to work in your favor.
For the past year, I’ve been looking for a book to recommend for novice investors, a book that would offer sensible advice without becoming too technical. I believe I’ve finally found that book — The Four Pillars of Investing,
In the book, William Bernstein describes how to build a winning investment portfolio. He doesn’t focus on the details — he tries to explain fundamental concepts so that readers will be able to make smart investment decisions on their own.
Successful investments, he says, are build upon four “pillars”:
a knowledge of investment theory
an understanding of the history of investing
insight into the psychology of investing
an awareness of the business of investing
These topics sound dry and dull, but I found the book lively and engaging. It’s not an easy book — there are passages that require the reader’s full attention — but generally the author presents essential information without making it too complicated. Best of all, his advice is sound.
Pillar One: The Theory of Investing
Bernstein begins by offering a brief overview of investment theory. This may sound intimidating, but it’s not. The author presents the material in a way that makes sense, even to an average guy like me.
The most important concept in investing is that risk and return are inextricably intertwined. If you want to obtain higher returns, you must face the prospect of higher losses. If you want to avoid the risk of losing money, you must reduce the chance of higher returns. Bernstein stresses this point:
High investment returns cannot be earned without taking substantial risk. Safe investments produce low returns.
If somebody offers you that an investment is safe and offers very high returns, they either don’t know what they’re talking about or they’re trying to scam you.
Howvever, the risk of an investment can be reduced by holding it for a very long time. The longer you own a risky asset (like a stock, for example), the less the chance of a loss. You can also diversify your portfolio — own other assets — in order to reduce risk.
Bernstein notes that past performance is no guarantee of future results. Everywhere in the investment industry, the performance of mutual funds is cited as a reason to purchase them. The author suggests this is crazy, and that regression toward the mean makes it likely that stocks and mutual funds with high returns in the past will have low returns in the future. The opposite is also true — poor performing investments are likely to improve in time. (This is only a general tendency, and not a hard-and-fast rule.)
If anything, the short-term returns from individual investments seem random. Bernstein writes that there is almost no evidence that professional money managers can regularly pick winning stocks. (Warren Buffett is an exception.) There is absolutely no evidence that anyone can time the market. Because of these facts, Bernstein argues that the most reliable way to obtain a satisfying investment return is to use index funds.
Pillar Two: The History of Investing
How many investment books do you know with sections about financial history? Bernstein devotes 36 pages to the subject, and it’s fascinating. By looking at centuries of information about financial markets, one can learn valuable lessons. For example, the Dot-Com Bubble of the late-1990s had many precedents in investment history. Bernstein cites famous bubbles from the past, including the South Sea Bubble of 1720.
But irrational exuberance isn’t the only problem investors face. Sometimes the markets are irrationally gloomy, depressing prices for prolonged periods. Bernstein writes:
The most profitable thing we can learn from the history of booms and busts is that at times of great optimism, future returns are lowest; when things look bleakest, future returns are highest. Since risk and return are just different sides of the same coin, it cannot be any other way.
By understanding the history of investing, you can make more considered, rational choices. Familiarity with the history of investing might have prevented (or at least mitigated) the recent tech and housing bubbles.
Pillar Three: The Psychology of Investing
“You are your own worst enemy,” Bernstein writes. The number one impact on your investments is you. He explains that diversification and indexing are the most reliable methods to obtain long-term investment success.
“If indexing works so well,” he writes, “why do so few investors take advantage of it? Because it’s boring.” Many people believe investing should be exciting. But that’s not the case.
Bernstein provides a list of techniques to deal with psychological pitfalls:
Recognize that the conventional wisdom is usually wrong. Don’t participate in herd behavior that exacerbates booms and busts.
Don’t become overconfident. Don’t believe that you’re smarter than the market.
Ignore the past ten years. Recent performance has little bearing on the future of a particular stock or mutual fund.
Avoid “exciting” investments. You shouldn’t invest for entertainment. This isn’t gambling. You invest to protect and grow your principal.
Don’t let short-term losses affect your long-term strategy. Too many people panic at the first sign of trouble.
Know that the overall performance of your investment portfolio is more important than any single part. You will have investments that decline in value from year-to-year. Diversification helps to mitigate these losses.
As with the history “pillar,” just being aware of the psychological component to investing can help prevent some mistakes.
Pillar Four: The Business of Investing
In the fourth section of the book, Bernstein demonstrates how the financial industry is designed to part you from your money. Brokerage fees, mutual fund expenses, and taxes all produce heavy “drag” on your financial portfolio. A smart investor does her best to reduce all three.
But there are other enemies lurking in the wings, too. Inflation is the silent destroyer of money. Meanwhile, traditional financial journalism tends to hype hot mutual funds and brokerage houses — spreading what some people call “financial pornography” — in order to boost sales. Bernstein notes:
You can only write so many articles that say, “buy the market, keep your costs down, and don’t get too fancy,” before it starts to get very old.
So the magazines and newspapers resort to sensationalism. He says that in generalyou’re better off ignoring the financial media. Financial experts don’t know where the market is going or why. Educate yourself and make your own decisions based on market performance.
Related >> Investing 101: A primer on mutual funds
Putting It All Together
After introducing his four pillars of investing, Bernstein explains how to use them to build a stable financial “house.” In fact, if I had read the chapter “Will You Have Enough?” before last Tuesday, I might never have posted my thoughts on retirement and financial independence; the book gives some advice on planning how much you’ll need for retirement.
Related >> Thoughts on Retirement and Financial Independence
In the end, Bernstein summarizes the fundamental message of his book:
With relatively little effort, you can design and assemble an investment portfolio that, because of its wide diversification and minimal expense, will prove superior to most professionally managed accounts. Great intelligence and good luck are not required. The essential characteristics of the successful investor are discipline and stamina to, in the words of John Bogle, “stay the course”.
I’ve read a lot recently about individual investors who try to beat the market. Some are able to do so in the short-term, but few are able to do this consistently in the long-term. Some use Warren Buffett as an example of an individual investor who has been able to achieve stellar returns. Buffett has worked full-time for more than fifty years to achieve these fantastic results. And even Buffett believes that 99% of investors would be better off choosing index funds.
Final Thoughts
I am not Warren Buffett. I don’t have the time, skill, or inclination to pick winning stocks. I’m willing to “settle” for spending a few hours a year constructing a portfolio of index funds that will do better in the long-term than the results achieved by most professional money managers.
The Four Pillars of Investing is challenging in places, but it provides an excellent introduction to the theory, history, psychology, and business of investing. If you’re just getting started, borrow this book from the library. Stick with it. If you’re able to finish, you’ll have a better grasp of investing than 99% of your peers.
Earlier today, I reviewed the new book from The Motley Fool, Million Dollar Portfolio. I had the pleasure to interview author David Gardner at the end of December. This post contains excerpts from that interview. The complete interview will be included as part of the hypothetical future Get Rich Slowly podcast.
J.D. Earlier this year, you met with Stephen Popick, a government economist who writes for Get Rich Slowly. During the first part of your interview, you talked about teaching children about personal finance and investing. You talked about a long-term version of the stock-market game.
I like the idea of a stock-market game, and I’ve had some people ask me about similar things. They want to know if there are similar tools or methods for adults who want to learn about investing without risking their capital just yet.
David First of all, I enjoyed meeting Stephen a lot. He’s a very nice guy. I think at the time, he and I were talking about CAPS and about what we’re doing on our site with that, and that’s what’s coming to mind as you ask me the question.
I think the purpose of a site like CAPS is to enable people to score themselves. You know, to actually step up and instead of at a cocktail party saying “I think CROX is going down!”, if you think CROX is going down, type it in. Put it right into this transparent open platform where you thought CROX at this date at this price was going to lose to the stock market. And that’s what CAPS does.
The way I sometimes describe it is that it’s like one big stadium. All the world’s invited to sit, all the world’s invited to play right out on the field. Anything you do on the field, the whole world will see and will always know about from here on.
J.D. The Motley Fool in general and Million Dollar Portfolio specifically [are] about picking stocks. [The book] is written for the individual investor who wants to own individual stocks. Yet early in the book you write that, “If you’re a beginning stock investor, your portfolio should be built upon a sound asset allocation plan and a set of carefully chosen mutual funds.”
I was wondering if you could elaborate on this. What’s the relationship between mutual fund investing and investing in individual stocks? At Get Rich Slowly, as I’ve been learning about investing, I’ve stuck pretty close with index funds. But I’m wondering if you can talk about the relationship between mutual fund investing, or index fund investing, and investing in individual stocks. When do you make the transition from one to the other? Do you do both at the same time?
David That’s an excellent question. In fact, it’s really the question that each of us has to ask ourselves. Part of what we’re trying to do with the book is to show people that there are multiple ways to invest successfully.
The truth is there are innumerable ways to invest. It more comes down to figuring out what color your parachute is. That’s really largely based on three factors:
Factor number one is the degree of involvement that you want. If you’re going to spend no time at it, you’re going to want to invest much differently than if you’re going to spend all your time at it. Obviously most of us are somewhere in between.
The second thing that’s really important is something to do with your temperament or your mentality. It’s one part risk-reward — how much are you willing to take in both cases — and another part your intellectual curiosity (or lack thereof) — understanding how best to suit your investments to your own mind.
Number three is making sure your money is aligned with your own passions and interests. An analogy I’ve used a lot is that if and see the books on your shelf, I feel like I know you. I can say, “Okay, that’s what J.D. reads,” and I can probably make some guesses about who he is and what he’s interested in. I should have the exact same experience if I picked up your brokerage statement or if I saw your overall financial plan.
Number one is about your time, number two is about your psychology, and number three is about you, and making sure that your investment portfolio gives me a clear read on you.
J.D. Say you’re an average investor. You have a 401(k) through work and then a Roth IRA on the side that you manage yourself. I want to know how you go about investing in individual stocks in a way that makes sense.
I guess what I mean is, I think the book recommends 12 stocks and it also recommends 30 stocks for a diversified portfolio, but if you only have $5,000 a year for your Roth IRA, how do you approach this, especially so that transaction fees don’t chew away your capital?
David If I had $5,000, the first thing I would do is I would probably make five $1,000 investments. With one of those thousands, I would definitely buy an index fund. I would start right there.
We love the index fund. As much time as we spend talking about stocks, we tried to champion an index fund for 15+ years. In fact, we had Jack Bogle in our office just ten days ago talking to our employees. We’ve become good friends with Jack over the years. We have a huge degree of affinity and for the index fund.
Where we part with Jack is that we think of that as the benchmark. That’s the “you didn’t have to spend any time, you didn’t have to apply any brainpower, you just basically went autopilot”. The funny irony of that — as you well know — is that autopilot beats most of the other pilots out there most years.
We think, “Hey! I can beat the autopilot.” […] We feel as if — and I think our public record proves this — that we can beat the market. It’s not about never having any losers, and it’s certainly not about always beating the market every year. It’s about not paying anybody a management fee, and over time doing better than all those who are.
But you do have to put some time into this. If you’re going to try to beat Jack Bogle, you’re not going to do it by hiring somebody else to do it for you. You’re going to probably have to roll up your sleeves and learn over time. You’re going to have to bloody your nose a bunch of times, you’re always going to be humiliated by years like 2008, no matter who you are. You have to be willing to be that way.
A little bit of a blustery answer there. Yeah, so that was my whole key into the $5,000. I would take the other $4,000 and buy four different stocks.
J.D. But the one thing I worry about is that each time you purchase a stock, you’re paying $20 or whatever it is, so you’re sacrificing something right away.
David Actually, you can pay no dollars for it, pretty much. Or let’s just say five bucks.
J.D. I guess Sharebuilder can do that.
David Yeah, and have you looked at Zecco at all?
J.D. I haven’t actually used it, but I’ve looked at it a little bit.
David Well, there are some funny crazy models that can reduce your costs to almost zero. You can definitely pay less than ten bucks. In other words, if you were looking at a $1,000 investment, you’re paying less than 1% for your transaction in.
J.D. So as long as you’re holding it and not churning your stocks, you’re keeping your costs low.
David Yeah, that is certainly true, and that’s something we’ve advocated.
So, if you’re trying to answer that $5,000 question, I would take four stocks…and I would make sure they were from four different industries. I would pick companies that I’m personally motivated to follow, that I’m energized to learn more about, not something somebody told me about that’s somebody else’s industry I have no interest in.
That’s not the only way to answer that question. It’s also not the only way to invest. That’s just the “get started” approach, where you’re actually going to be able to earn more money over time.
J.D. I’ve been reading Roger Lowenstein’s biography of Warren Buffett. As I’m reading that, I’m just shocked at how over and over again the market will go through down periods like the early seventies or the late eighties. Again and again people proclaim “the death of equities” and how the stock market is no longer the place to be.
But Warren Buffett is waiting there patiently. As people are saying that, he’s being greedy when others are fearful.
David I don’t think the stock market is so much a thing to ultimately believe in or not. I just think of it as an opportunity to become a part owner of companies.
I think capitalism works. That’s one of my basic beliefs. And as long as capitalism is being practiced effectively by a culture (or by the world), there will always be good stocks. Therefor it’s always worth paying attention. But you don’t actually have to think in stock market terms.
“The stock market” as a label is too broad. It’s too broad a brush to paint. I don’t really think about “the stock market”. I think about my individual stocks. Some of them do better than the market; some of them do worse. In the end what you’re doing is becoming a part owner of things. And as long as you believe in ownership and capitalism in that sense, why wouldn’t you have a life-long love affair with the stock market? Or at least realize that it’s a really interesting place to learn?
Even if you didn’t invest, if you’re in business, or really in our culture and you’re trying to make good decisions about either the company you work for or if you’re trying to guess trends or anything like that, you absolutely want to become a student of the game of business.
That’s really all the stock market does. It scores and tallies what’s happening in the game of business over time.
I don’t quite understand somebody if they were to say to me, “I don’t even look at the stock market” or “You’re either in it or you’re not”. My opinion doesn’t change. The one way that I can say I’m Buffett-like is that my opinion of the purpose of it and the underlying system doesn’t change. I don’t jump in and out of the market over time.
J.D. Right. So long term, it’s a “weighing machine“, as Buffett would say.
David I didn’t have that in mind as I was speaking, but I’m glad you came up with it. You and I know it starts with “in the short term, it’s a voting machine”. The purpose of that line is simply to remind people to try to look past the present. That’s contrary. That’s hard to do. Most people don’t do that by nature. Some people are probably incapable of doing it. The reason he reminds us of that is you’re going to make better financial decisions if you can gain that ability.
Thanks to David Gardner and The Motley Fool for taking the time to speak with me. If you have suggestions for future people you’d like to see interviewed, please let me know. Also, please let me know if you have feedback on the interview itself. I’m still new to them.