Fear and doubt

[forestj]

First of all, let me introduce myself. I'm 23, I'm working for a software consulting company, (70k), and I'm new to investing.
I agree with almost everything that MMM writes, but I am not sure I agree with his investing strategy. I think it was a great investing strategy for 1998-2015, when it was implemented, but I don't expect it to work, or work as well, between now and 2035.

When I look at the world today, I see growing inequality, dwindling resources, and I also see some interesting things happening in the financial world: The '08 market turmoil and subsequent QE program. These things weren't really a concern 20 years ago.

Ultimately, it looks like a pyramid scheme to me.
I think of money as a promise, given by our economy, for an amount of work done in the future. I work every weekday for some money, and because I am a privileged person who has a skill which is in high demand right now, I can indirectly/partially "employ" 100s of other people to feed, shelter, and clothe me. I pay everyone who grows, inspects, and manufactures the food I eat, and I pay everyone who helped bring gasoline to my car so I can drive to work.

Our financial system is very good at making promises. In fact, its fundamental structure relies on exponential growth of the rate at which these promises can be redeemed. So far this has worked out pretty well because we have always been able to produce machines which increase economic efficiency at a rate which matches the exponential growth of promises. In other words, what used to take 100 man hours to accomplish now takes 0.01 man hours, due to the exponential growth of machine efficiency.

I think coal, oil, and gas are the best example of increased efficiency in our lives. And now they are becoming harder and harder to find. The next exponentially more efficient thing we can do to get energy is (probably) the construction of a bunch of of salt cooled fission breeder reactors. But this seems really far off to me. China is the only country putting resources into R&D for these things, and they are having very slow progress. The other "alternative" energy sources are not more efficient, and they are often just as hard to implement as attempting a safe&efficient nuke solution would be.

So, I expect that my life will span a period of energy scarcity. And because I see money as a promise for work, and energy as the only significant producer of work in our society, having almost entirely replaced human manual labor, I am worried about how much work my money will be able to buy in the future. In other words, I expect the price of energy to rise, and the price of everything else to rise as well.

To make things worse, the level of wealth inequality that we have is staggering. There is a lot of money floating around out there. If resources get scarce, this money is going to go after them. Any amount of money I can reasonably expect to accumulate during my lifetime is a pittance compared to the amount of money held by the top percentiles of wealthy who control over half of the world's wealth. If that half of the world's wealth goes after scarce resources, the prices will rise astronomically. For people who have hundreds of millions, that's no real skin off their back. For those who are currently destitute, it would probably mean dramatic reduction of life expectancy. And for me? I don't know, but it doesn't sound good.

It seems like the stock market is a promise on top of a promise, which can only ever be redeemed if countries and economies get their ducks in a row and start building next generation technologies which are 100x more efficient than what we have now. I'm not sure if this can happen before fossil fuel's energy return on energy investment goes from bad to worse and we start having huge volatility in financial markets.

So I'm kind of hesitant to "put my money into" *anything*. And keeping it as cash seems even worse! I wish I could invest in something that seems like it will always be useful, like a cardboard manufacturing plant or something, but obviously I can't afford to buy one outright.

I know that probably most people here don't share my pessimistic view, but I'm curious to hear what you think about it. You probably don't invest with these sort of thoughts influencing your decisions. Why not? What do you base your decisions on? What do you decide as a result? I noticed that index,index,index seems to be the name of the game on investing forums these days.

Should I just bite the bullet and ship my $$$ away to Vangaurd index funds with the click of a button? At least if what I'm worried about DOES happen, I won't be any worse off than everyone else who followed the internet's most popular financial advice, lol :P

And if the economy doesn't contract, then, well, I'm rich $_$. How bad can it be, right?

[deborah]

Right.

[PEIslander]

I don't have the answers you seek. I don't seek the same assurances in my life.

In my 53 years I've witnessed a lot of change. As I child my family moved from Canada to Germany for a few years. We took a transatlantic flight --- the plane had propellers! If we had gone a year or two before we probably would have had to take a ship. I remember cars not having seat belts and I remember the first time I saw a colour TV - I was in grade three or four. I lived all my teenage years without ever seeing a computer (other than Radio Shack TRS80's). I've lived through the period when the Bank of Canada's prime rate rose to a mind boggling 22.75%. I've experienced the Canadian government imposing marshal law and price & wage controls. In my 20's, my father-in-law bought a car phone. It was a bulky hand-set with a cord attached to a heavy box -- the box almost as big as a shoebox that must have weighed 15-pounds.

Throughout my life I've had a roof over my head and food to eat. The things that changed didn't really change the things that mattered. I've learned I don't need much to be happy. For my future retirement I aspire to living a simpler life than I do now --- one where change will matter even less.

[Indexer]

You think this is a new way of thinking.  Actually someone somewhere has been making the same argument since... IDK... the 1920s.  Everyone thinks their generation has hit the limit of progress, it can't possibly go further than this!

Every generation has trials and tribulations, and every generation thinks their trials are worse than before.

We have made it through some VERY serious things.  WWI, WWII, the great depression, countless other wars, hyper inflation, oil embargoes, etc.  The stock market had its swings but over the long term it went up.

So, I expect that my life will span a period of energy scarcity.

When I was right out of college I worried about the same thing.  Then I read how solar panels are becoming so efficient that they are passing mined coal in terms of cost/energy.  Utility companies are FREAKING out because so many people are putting up highly efficient solar panels that provide more energy than they need that the people are selling the energy back to the grid.  Read up on it.  You are worried about energy scarcity, at the same thing the energy producers are worried about energy abundance putting them out of work.  Oh yeah, and oil has been hovering around $45-55 barrel. ;)

We are also working on perfecting fusion.  I know people have been saying that for decades.  Now we can actually turn it on, make it work, we just need to make it more efficient.  Then you have CERN trying to figure out the secrets of the universe and they keep creating anti-matter in the process which reduces regular matter into pure energy.  Yes its all almost science fiction... but in the meantime we still have our super efficient solar panels and oil.

We are also on the verge of having cars that drive us places on a large scale.  This is going to take so many things in life and turn it on its head.  If a highly efficient car can drive you places while you do something else... suddenly people are ok with even longer commutes(but not us mustachians).  Self driving cars are also more efficient so they can use less gas in the process.  Local municipalities lose all their income from speeding tickets and DUIs(I'm drinking... but the car is driving).  Mercedes predicts cars that can drop you off and then go park themselves.  No more insane parking prices in big cities.  They imagine instead big cities will have zero parking in the city with giant... GIANT large building sized parking decks on the outskirts of cities where all the cars will park themselves until their masters ask for their return.  Cab companies are worried about uber.  If your honda can drop you off and then pick you up, and it drives itself so no worries about DUI... yea cabs driven by humans will be put out of business everywhere.

Google is building fiber optic cable.  Honestly this is probably one of the things our government should have done after 2008 to create jobs....  The net is speeding up!

Elon Musk wants space exploration!

The world is still spinning my friend. 

And the finance industry actually does expect lower long term returns than we had in the 50-60s.  HOWEVER they also expect lower inflation ;).   If you earn 10% but have 4% inflation you actually get 6% real returns.  If you only get 6-8% going forward but inflation is 1-2% it isn't so bad.

Yes buy big index funds.  In 1900 the largest sector of the stock market was rail roads.  Now those rail roads are a tiny piece of a smaller sector.  Own every publicly traded company in the world.  Benefit as the world keeps on spinning!

[josstache]

If the world is screwed, you will be too regardless of what you invest in (or don't invest in).  If the world isn't screwed, you'll get rich if you invest.  That's the way I look at it anyway, kind of like Pascal's wager (which itself presents a false dichotomy).

[StressLess]

Hey,

You're obviously a bright kid.  You make some very interesting and intelligent points.

Don't worry too much about where you think the market is headed. You're making enough where maxing out your 401k won't really affect your take home pay that much (at least do the amount they match).

The tax savings on that is huge, in your bracket with fed and state it's nearly 40%.  Then they match and whatever returns you get are just gravy.

Id say start investing asap and see how that feels.

If you start now you'll be the 1% before you know it...

[eyePod]

Try reading this stuff at waitbutwhy http://waitbutwhy.com/2015/01/artificial-intelligence-revolution-2.html?utm_source=List&utm_campaign=867044c6bb-WBW+%28MailChimp%29&utm_medium=email&utm_term=0_5b568bad0b-867044c6bb-50738249 (this is part 2, part 1 link is in the article) to see why any time we think about our societies limits, we're wrong.

[kathrynd]

I don't have the answers you seek. I don't seek the same assurances in my life.

In my 53 years I've witnessed a lot of change. As I child my family moved from Canada to Germany for a few years. We took a transatlantic flight --- the plane had propellers! If we had gone a year or two before we probably would have had to take a ship. I remember cars not having seat belts and I remember the first time I saw a colour TV - I was in grade three or four. I lived all my teenage years without ever seeing a computer (other than Radio Shack TRS80's). I've lived through the period when the Bank of Canada's prime rate rose to a mind boggling 22.75%. I've experienced the Canadian government imposing marshal law and price & wage controls. In my 20's, my father-in-law bought a car phone. It was a bulky hand-set with a cord attached to a heavy box -- the box almost as big as a shoebox that must have weighed 15-pounds.

Throughout my life I've had a roof over my head and food to eat. The things that changed didn't really change the things that mattered. I've learned I don't need much to be happy. For my future retirement I aspire to living a simpler life than I do now --- one where change will matter even less.

I'm a year older than you.
Thanks for the memories :)

forestj,
Here is what my husband and I did.
We paid for our house, by working all the overtime we could, and then we started out family.
One parent stayed home.
Eventually we used the equity from our house to use for down payments on rental properties.
We bought aggressively for 6 years...and then retired.
We live off rent.

We still have debt, but every year it is getting smaller.
Frugality is simple, when you are happy.

Don't worry too much about the future.Work and save.
Some people like mutual funds (I did it for a while, but it wasn't for me)
I like being in control, and for me, that meant rental units.

[morning owl]

You can either get your income from a job, i.e. one company, if you're an employee, or a small handful of companies, if you're a freelancer, or dozens / hundreds of companies, if you're an investor. (Hundreds if you are an index investor, as MMM is.) Which route seems the safest and least volatile?

IMO relying on one company for income is the riskiest route to take. Diversification is key.

[MrGreen]

If you are concerned about the limits of progress all you have to do is look at current sci-fi movies. There's a reason much of the technology dreamed of in those movies makes it into our future lives. Don't forget about the fact that the majority of the world population is still considered "third world." Plenty of progress to be made there.

[wtjbatman]

I think I knew almost as much as you when I was 23.

Somehow, today, I seem to know less. Funny how that works.

[capitalninja]

First of all, let me introduce myself. I'm 23, I'm working for a software consulting company, (70k), and I'm new to investing.
I agree with almost everything that MMM writes, but I am not sure I agree with his investing strategy. I think it was a great investing strategy for 1998-2015, when it was implemented, but I don't expect it to work, or work as well, between now and 2035.

The more things change, the more they stay the same. Short of dictators and monarchs, the wealthiest people throughout history have been business owners and/or investors. When you invest in equities, you're investing in businesses that create and sell products or services that people are willing to pay for. You're not investing in "the stock market". The stock market is the medium you're using to invest in the underlying corporations. That's why the number assigned to the Dow or NASDAQ from day to day or month to month is really irrelevant in the big scheme of things.

Good businesses generate profits and owning parts of those businesses allow you to participate in those profits. This will not change in the foreseeable future.

Regardless of what's currently happening in the world, money still buys freedom to do pretty much anything you want within the bounds of the law. While I certainly see your train of thought, the fact remains that you personally don't have the ability to change much of what you're worrying about, so why worry about it?

I'd implore you to get away from the paralysis from excessive analysis and get on with the business of building wealth.  :-)

[Louisville]

I'd implore you to get away from the paralysis from excessive analysis and get on with the business of building wealth.  :-)

+1 (emphasis mine)
Yeah, dude, you're smart, but maybe you're out-smarting your self. If the world's about to go to shit, it doesn't matter if you invest or not. If the world is not about to go to shit, then investing is a good way to go. You said it yourself.
Or, you could "invest" in arable land and the know-how to farm it, guns and ammo to protect it, etc. That way you can be a subsistence farmer when the world goes to shit.

[firebeard]

Indexer, thanks for sharing your thoughts.  I largely agree with them and think they can be summed up roughly as the following:  if the world market tanks and growth stops completely, we all have much bigger problems than just losing asset value, even if asset value is maintained, since there would largely be anarchy.  On the other hand, if the world does poop out, then as capitalninja points out, all we mustache growers will be sporting big grins along with our soup strainers ;)

Also, Indexer points out that we can expect growth in developed nations will be due to future tech like clean renewable/"free" energy, advanced AI, robotics, biotech, and space exploration.  (As an aside, I personally hold a lot of hope for space exploration, because what do we done once we've used up the one planet we've got?)  And even before we get crazy tech like robo-cars, maybe even teleporters one day, a lot of the world doesn't have the crazy amounts of ridiculously good infrastructure that support and educate (I'm considering schools to be a kind of national infrastructure) us folk lucky enough in our lives to banter these concepts around on MMM's forum.  So yeah, there's a lot of room for growth and development left in the world.

That said, as OP points out, the ultimate limiting factor is our environment:  how much have we got left in terms of resources, and how polluted can we make our environment before it is no longer capable of sustaining a positive population growth rate?  I hope I don't find out the answers to these questions from experience during my lifetime, and I also place great hopes on space exploration and clean energy.  Clean energy is already extremely important, and according to a study by some really smart folks from Google (http://spectrum.ieee.org/energy/renewables/what-it-would-really-take-to-reverse-climate-change), we're already past the point of no return for greenhouse gasses.

So, I'm going to keep investing in my index funds, practice mustachianism for the benefit of myself and the world, and pray we don't drown in our own mass-manufactured, battery- and oil-powered pollution.


(Yeah, just writing this on a mass-produced computer is hypocritical, but at least my keyboard is from the 80's!)

[hodedofome]

As some have said, if you are making a bet on an end of the world type situation, just remember that there won't be anyone left at that point to pay you off:)

Thinking about some of the issues we may run into in the future is what caused me to focus on risk management and diversification over maximizing the return if the world turned out ok. If the world is all gonna be gravy the rest of our lives, then you probably won't find a better investment than to be 100% in worldwide stocks. If you think that there's a possibility of a really long stretch of pain, then diversification makes sense. I decided diversification and controlling risk to the downside would be my main focus, and making money would be secondary. If I can control the downside, then I figure the upside will take care of itself. It led me down the road of trend following and momentum type strategies, which is what I currently use for all my taxable and retirement accounts. I can be in stocks, bonds, commodities or 100% cash if the market environment calls for it. It's the best and simplest and most robust way I could come up with.

To further the diversification, I'll probably add in a value investing strategy at some point in the future as well.

An even more simple portfolio would be something like the permanent portfolio. You can diversify even further by owning real assets such as your house, land (especially productive land), jewelry/art and actual businesses. If you look at dynastic wealth over the past several hundred years, families have survived by owning actual businesses and real assets that could be transported out of the country fairly easily (like jewelry) during the event of a war or something. Families have survived with their finances intact in Europe despite having war after war after war come through their country. The more you diversify, the more you protect what you got. But then you'll also prevent yourself from benefiting the most if the world turns out ok after all.

[skyrefuge]

I agree with almost everything that MMM writes, but I am not sure I agree with his investing strategy.

A much bigger difference than your investment philosophies is your difference in disposition. MMM exudes confidence and optimism about the future. It seems strange to me that your nervous and pessimistic personality could even connect enough with MMM to lead to you reading his blog, registering at his forum, and making a post here. But hey, maybe we caught you early enough that you're still changeable, which would be great!

I think it was a great investing strategy for 1998-2015, when it was implemented, but I don't expect it to work, or work as well, between now and 2035.

LOL. 1998-2015 contained two of the biggest stock market crashes in the last 100 years! The real annualized return of the S&P 500 over that period was about 4%, way below the long-term return of 7%. Your perspective of that period is the exact opposite of most people who actually lived and invested through it. Despite that, yes, it was still a great investing strategy!

When I look at the world today, I see growing inequality, dwindling resources, and I also see some interesting things happening in the financial world

Did you never take a history class? 23-year-old pessimists have been seeing these things for all eternity. And they've been continually proven wrong, and turned into disgruntled 63-year-olds who have no money.

Read about "peak oil", a concept that pessimists have been wrong about for 45 years. Read about The Population Bomb, a popular book from the 70s that said the same things you're saying now, except it predicted all those things would be happening a decade before you were even born!

Question to the Mustachians: does anyone have a collection of pessimists like this that history has revealed to be funny? A link to a collection of quotes/articles showing how the modern pessimist is unknowingly repeating the beliefs of historic pessimists?

I'm thinking something like this classic xkcd, The Pace of Modern Life, which is a collection of quotes that sound like modern commentators decrying the social and moral decay brought on by "The Internet Generation", when in reality the quotes are all over 100 years old.

Seems like something some wise Bogleheads would have collected at some point...

[RapmasterD]

I believe our best moments lie ahead. After what will be 16 years of highly galvanized leadership in the U.S., I believe we are due for and will vote in a transformational leader.

As a society we are becoming more productive.

Our lower middle classes live better than nobility did 150 years ago.

We have unprecedented opportunities to gain a pragmatic education for small dollars (NOT from community colleges) and gain meaningful employment, as long as we're open to change, adaptability, and continuous learning.

And as we create more high paying jobs and more long term unemployed return to the workforce, incomes will rise, lifting all tides.

It's a great time to be alive!

[YoungInvestor]

So I'm kind of hesitant to "put my money into" *anything*. And keeping it as cash seems even worse! I wish I could invest in something that seems like it will always be useful, like a cardboard manufacturing plant or something, but obviously I can't afford to buy one outright.

If you really want a cardboard manufacturing plant, find a company that makes cardboard stuff and buy some shares. Congrats, you now own part of a cardboard manufacturing plant.

[forestj]

Thanks for all of the thoughtful replies.

Read about "peak oil", a concept that pessimists have been wrong about for 45 years.

I wouldn't be posting this if I hadn't already gotten the peak oil Spiel from my parents :O). As far as them being wrong for 45 years, you are right in terms of "really bad economic ramifications haven't happened". But in terms of the quality and quantity of oil discoveries, EROEI, and the increasing environmental problems caused by "advanced" drilling techniques like fracking, their models from long ago are actually still looking pretty good, as far as I know.


Is everything still awesome , even though the numbers on oil look a bit dubious on a long term time frame? Maybe so. Y'all have mentioned solar panels a lot, and I agree that while they have their limitations, they also still have room to grow. For example, nanoparticle-based solar panels that don't require rare earth metals or crystalline silicon could theoretically be printed onto rolls of thin steel sheet, causing cost per watt will fall off a cliff, giving the kind of order of magnitude improvement that could help us get over our oil/coal/gas problems.

I agree that people throughout history always believe the world is currently coming to an end, and yet the world hasn't ended yet. I can see why I would feel that way myself, because I have had problems with depression for most of my life.

Is the currency/oil/climate crisis just a humanist's version of The Rapture? I do have faith in my "religion", but I have a hard time telling whether it's rational or not sometimes.

It seems strange to me that your nervous and pessimistic personality could even connect enough with MMM to lead to you reading his blog, registering at his forum, and making a post here.

Well, I have a hard time finding a large group of people who agree with me on subjects like how we should get to work, what we should eat, where happiness comes from, etc etc. Mustacianism fits the bill perfectly. I was doing the frugal thing almost exactly like MMM does for years before I even know he existed. Seeing this blog was really inspiring for me because it seemed like it could be a window into my future, where all of my hard work, diligence, and time put into intentional living pays off with a life of freedom outside the Walls of Wage World.

I just have a very critical eye, so when I see something wonderful like that, my first thought isn't "Oh Boy! I'm so excited I get to have this!"

Instead, it's "Anything that can possibly take this away from me must be dealt with immediately."

I think the most valuable insight from mustachianism, and from the posts that everyone has made here, is that, if you really believe in something, nothing can take it away from you. Even if the bad things happen, it doesn't matter, because you already freed yourself from wanting, and so if your brokerage account & IRA disappear and you have to start all over again, your reaction won't be "Oh no, I will have to work for peanuts until I die just to sustain myself! My Life SUCKS!"
Instead it will be "This is an opportunity. I can cut my spending again. I can do better economically than everyone else around me and fall into a position of strength again. This time I'll do it even better."

It reminds me of the little bit that I know about Buddhism: The more you want, the more your life is going to suck. You have to let go of all that in order to be happy.

So, I think I agree with most of what has been posted here -- especially the game theory example:

Equities Allocation, Everything Is Awesome: Congrats, you are set for life.

Doom&Gloom Allocation, Everything Is Awesome: You wasted all your money. Luckily for you, there is still opportunity in the world.

Equities Allocation, Huge Crisis Occurs: You wasted all your money. Time to learn how to grow & preserve food.

Doom&Gloom Allocation, Huge Crisis Occurs: You are doing ok, and you have money, but there is nothing to buy. You already know how to grow & preserve food.

I think my choice will be to go for some indexes, but try to control risk as was mentioned by hodedofome. I'm just not sure if I have the time and energy to study the financial world enough to learn what the risks really are and what to do about it. It seems like no one really knows what the short to medium terms risks are anyway :\