Category Archives: Financial Literacy

What Is Financial Independence?

Here are my notes from a speech I gave yesterday at the Port Orange Toastmasters club contest. While I came in 2nd out of 3 contestants (Dr. Charles Carroll won with his speech on smiles), it was a great experience to compete in a club contest for the first time, and we had a larger audience than usual—about 25 people. I actually ended up speaking without the notes at all, though I set them on the table as a psychological device and could have looked at them at any time.

What Is Financial Independence?
Speech by Richard Thripp | 5–7 minutes
Port Orange Toastmasters Club Contest
February 22, 2017

How to FIRE yourself and never work another day in your life unless you absolutely want to.

Imagine never having to work another day in your life
When?
You might think at Age 65 or Age 70
What if it could be earlier?
FIRE yourself
That’s F-I-R-E
Financial Independence and Retire Early
Big online community: Reddit, blogs, et cetera
Many retiring at 40 or even 30
What do you need to FIRE yourself?
Ideally, about 20 times your annual cost-of-living
This is a lot
40 times a 6-month emergency fund
If your cost-of-living is $50,000 per year, you need to invest 20 times that = $1 million
Live off dividends
Invest where? Mostly whole-market or S&P 500 index funds [with Vanguard]
Max out 401(k) and IRAs for tax savings
NOT money market savings — must be stocks [Can put 401(k) + IRAs in stocks]
Whole market reduces risk
Long time horizon reduces risk
After maxing retirement accounts, use taxable investment accounts
Yield of whole-market index fund = Average 7%, INFLATION ADJUSTED, per year
Money doubles every 10 years
MUCH HARDER to achieve financial independence without stocks
Long-term (> 1 year) capital gains tax only 20% max, compared to 39.6% for earned income
What is financial independence?
The ability to not work another day in your life

It doesn’t mean you MUST not work
Many people enjoy working
If freelancing, et cetera, the 20× rule might become the 10× rule
HOW to become financially independent?
MUST save tons of money
Maybe 50% of income
Hard if you’re a “shop-a-holic”
Hard if you have kids
But, many tricks
Example: Moving to a lower cost-of-living area when retiring
MUST change your money mindset
More tools available than ever
Get online and start reading
FIRE yourself


Here are the notes I took on my speech performance immediately after giving the speech. Yes, I wrote them in third person, which is weird.

How do you become financially independent?
Save save save
Invest in stocks
Low-fee index funds
Told story about TIAA charging 14% management fees and making it very hard to get money out
Trump’s in; Stock market going “bonkers” — why was my TIAA money going down?
Richard engaged audience many times by asking them to raise their hand — how many know what financial independence is? How many believe a CD is a good vehicle (none)? How many believe all bonds is good (none)? Then, Richard joked how smart the audience was. He also joked about being able to leave a job where the boss is making inappropriate jokes requiring an uncomfortable smile to keep one’s job (referencing Charles’s speech).


A fellow Toastmaster approached me after the speech, incredulous that the stock market produces 7% annualized inflation-adjusted returns on average. Here is additional information I wrote for him:

Here is a source on the 7% annual average returns in whole-market or S&P 500 index mutual funds:

www.thesimpledollar.com/where-does-7-come-from-when-it-comes-to-long-term-stock-returns/

The FIRE (Financial Independence, Retire Early) calculator at FIREcalc.com can show you projected returns based on all prior year periods based on how much money you intend to retire with and how many years the money needs to last.

If you have enough money, you can just live off the dividends of this index fund: personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT

Of course, we are in an unusual time right now (market is up 22% in the past year). It’s hard to say whether investing now is a good idea (is the market in a bubble?), but generally, trying to time the market doesn’t work well, so most people advise investing now, or a little bit each month.


More thoughts:

Obviously, if you put your money in stocks just for one year, there is about a 25% chance you will lose money, and maybe a 40% chance you won’t earn 7% returns. But, if the money is in there 10 years, the odds of at least 7% annualized inflation-adjusted returns are higher (which means your money could double—1.07^10 is 1.97), and over 20, 30, or 40 years, even higher still. This is why a long time horizon is important, and why retiring early with hefty investments is not only psychologically powerful, but financially powerful.

For further reading, I suggest James Collins’s blog and the Financial Independence Reddit forum.

How the Doctrine of Diversification Misses the Mark for Personal Financial Portfolios

Traditional financial wisdom says that diversification should be used to mitigate risk, by this recommendation operates only at the portfolio level. Typically, older individuals, closer to retirement age, are advised to put a greater percentage of their money in less risky investments like bonds and CDs, while younger individuals should have an aggressive, growth-oriented portfolio of mostly stocks.

However, this approach, by itself, fails to consider the underlying need for avoiding financial loss, which in many cases will never become more than unrealized loss. That is to say, as long as the money is not needed during the period the loss is occurring and ongoing, the primary benefit of diversification—the ability to withdraw money during a bear market without losing as much—is unrealized.

Fidelity’s article on diversification explains how a diversified portfolio of 70% stocks and 30% bonds and T-bills would have significantly outperformed a 100% stock portfolio from January 2008 to February 2009 (the 2008 financial crisis), with –35.0% returns instead of –49.7% returns. However, when considering wider time periods, the diversified portfolio underperforms the 100% stock portfolio. We can effectively characterize diversification as a hedge against risk, reducing volatility at the cost of decreased returns over longer time horizons.

However, one’s future discretionary income can actually be interpreted as a hedge against loss. That is, if an individual or family lives well below their means, they may be able to maintain a more aggressive portfolio, because they can fall back on their income in bear markets rather than having to cash in their investments. A danger with this approach is that financial recessions can result in layoffs and reduced income. However, if one’s income is relatively reliable (e.g., work that is somewhat “recession proof,” Social Security benefits, and certain types of pensions), this danger is mitigated. Thus, if a young-old person receiving Social Security (SS) benefits wishes to continue aggressive growth of their investments for whatever reason, they can consider their SS benefits a hedge against investment risk. For example, if they live comfortably on $50,000 per year and receive $18,000 per year in SS benefits, they only need $32,000 in additional income per year. To the extent this money must be withdrawn from aggressive investments to fund one’s living expenses, the income is a hedge against downside potential, because overall, stocks continue marching upward quite vigorously, even though they may go down in many calendar years. (I am, of course, referring to broad mutual funds rather than individual stocks or sectors.)

Research shows that trying to time the market is not an effective approach (e.g., Henriksson, 1984). Consequently, rather than trying to time the market, and without concern to tax-advantaged accounts or tax brackets with respect to withdrawals, the best time to put money in stocks is now, in a lump sum (not dollar cost averaging), and the best time to withdraw money is as far in the future as possible, as needed (that is, avoid withdrawing a lump sum when only a fraction of the money is needed at a particular time). This is because overall, the market marches upward, despite volatility along the way. Therefore, the largest gains, on average, will be yielded by placing money in aggressive investments (stocks, not bonds or CDs) for the longest continuous length of time. For most people, attempting to time the markets on either end (investing or divesting) is not only an exercise in futility, but will be detrimental.

This may sound contradictory. If I recommend avoiding market timing because it doesn’t work, why would I argue that the primary benefit of diversification can be nullified by market timing? Actually, what I am talking about is not market timing, but rather avoiding being compelled to liquidate a position due to the financial hardship during a bear market. In a recession, not only will your investment portfolio lose value—you may also lose your job or take a pay cut, your home will decline in value, et cetera. Inasmuch as the value of diversification lies in being able to liquidate better-performing assets in a recession to make up for loss of income and other extraneous factors, the value of aggressive investing lies in making increased gains overall.

Conjecture: If withdrawals are stochastic in timing, then on average, the returns from a diversified portfolio will always be inferior to a 100% stock portfolio.

The ability to use reliable discretionary income as a hedge against loss enables one to avoid compelled liquidation during a recession, which, absent emotional issues, decouples withdraw timing from market factors and consequently reduces the value of diversification. Therefore, a portfolio analysis that does not consider debts or income may have substantial opportunity costs if a client over-diversifies due to having reliable discretionary income which is not considered, or under-diversifies due to having fragile income or liabilities which are not considered. In summary, as a doctrine, diversification should be titrated with a holistic analysis of one’s overall situation.

On the Purported Essentiality of Higher Education for the Adult Learner

Written on January 29, 2017 for an assignment in my Spring 2017 course, IDS 6504: Adult Learning, at University of Central Florida.

1. StatementQuote: The transformation of the world economy over the past several decades has put a premium on an educated workforce. A more fluid and volatile global economy is characterized by more frequent job and career change, which is an important factor in the growing demand for continual learning and skill enhancement. Because of these changes, it is clear that current and future generations of adult workers seeking employment and better quality of life will require more education credentials. Thus 2- and 4-year degrees, certificate programs, and workforce educational and training opportunities are becoming increasingly essential for all workers. (Hansman & Mott, 2010, pp. 19–20)

2. Explanation – There is a lot to unpack in this statement. First, we have to take Hansman and Mott’s arguments with a grain of salt—they are university professors and administrators, who are obviously not a neutral source to ask about the necessity of their practice. It is difficult to imagine them saying that higher education is becoming increasing irrelevant, even if it were true.

Next, we can contrast this 2010 book chapter, having been published after the 2008 financial crisis, with the Reach Higher, America report (National Commission on Adult Literacy, 2008), which was published just three months before the worst part of the financial crisis. The Reach Higher report complains that American adults are less educated than the generation before, unlike every other OECD free-market country. While it is unfair and inaccurate to blame the financial crisis primarily on Americans’ lack of education, in a time of economic recession, high-value skills are essential to obtaining a living wage. I would contend that Hansman and Mott (2010) would not have worded their arguments as strongly had they been writing a few years earlier, when times were good.

However, according to the U.S. Census Bureau (2009), in 2009, of adults aged 25 and older, 85% reported having a high school diploma or equivalent and 28% reported having a bachelor’s degree or higher. These statistics are higher than ever before. To say that Americans are less educated is a misnomer, at least with respect to formal attainment. Nonetheless, it is possible they are completing secondary and post-secondary education yet coming away poorly educated or educated in subjects that do not provide value to employers. If so, educators, administrators, and policymakers share much of the blame.

Economically, globalization is characterized as a foregone conclusion, except perhaps by nationalists like President Trump. However, in lieu of protectionist policies, it becomes necessary for adult learners to develop increasingly specialized and high-value skills to merit a living wage in the open market. Under globalization-friendly policies, coupled with mechanical and technological advancements, jobs can be outsourced to foreigners at a small fraction of the cost of an American worker. First, this applied to durable goods, and now, in the Internet age, it applies even to U.S.-based technical positions, and certainly any jobs that can be performed remotely (e.g., customer service). For example, Americans working in information technology (I.T.) frequently complain about reduced wages or unemployment due to skilled foreigners with H-1B visas flooding the American workforce. These foreign workers are willing to work for far lower wages than Americans were previously accustomed to.

Fundamentally, however, a significant component of the “growing demand for continual learning” (Hansman & Mott, 2010, p. 19) is induced demand. If not for Pell grants, student loans, tax money, and government guarantees, it is unlikely that many of the faculty and staff—even those employed at University of Central Florida (UCF)—would be able to sustain their tenure, salaries, or quality of life. Moreover, the federal government offers student loans at unnaturally low interest rates even to non-creditworthy borrowers pursuing unsalable degrees, further incentivizing perverse educational choices among Americans. Ironically, this may be even more destructive with respect to private institutions. For example, private universities like Keiser University and University of Phoenix are over-priced and fairly pointless compared to public institutions like UCF, and yet ill-advised Americans can be suckered into ridiculous and unnecessary debt burdens due to the illogical availability of student loans for private institutions with low return-on-investment (ROI).

The burgeoning sector of the American economy that operates with relative independence from market forces—government and government-sponsored or government-like enterprises (healthcare, education, large corporations, etc.)—is now the ticket to the American dream. Yes, advanced degrees are usually required. However, I contend that in many cases, the day-to-day duties in a surprising proportion of these positions could be performed by high-functioning high school dropouts with a few months of well-executed training.


3. Statement – “Nearly half of new job growth in the first decade of the 21st century required college or other postsecondary education” (Hansman & Mott, 2010, p. 19).

4. Explanation – Once again, the temptation to conflate formal education with real education is strong. What may really be happening here is that employers are requiring a 4-year degree as a weed-out. My Psychology B.S. does not make me any better an office worker, but in an employer’s market, employers are flooded with desperate applicants. Thus, they use shortcuts to thin the herd. This may be one of the antecedents of the bizarre credential-inflation phenomenon we have seen over the past 50 years. Even quite recently, new advanced degrees like the Doctor of Nursing Practice (DNP) have emerged, arguably to pander to this phenomenon. The cost to the adult learner is staggering. If a job that required 12 years education (Grades 1–12) in my grandfather’s time now requires 17 (Grades K–12 + Bachelor’s), the costs are huge, even to young adults who push straight through. (In truth, completing a 4-year degree in 4 years or less has actually become somewhat unusual.) Entering the workforce at Age 22 with $50,000 in debt versus Age 18 with no debt is a massive handicap, and this is a fairly conservative debt estimate. The 18-year-old can invest in retirement funds and brokerage accounts perhaps 10 years ahead of his/her college-educated counterpart, which can consistently produce a 7% inflation-adjusted annual return. Obviously, a 10-year head start yields an increase of 1.07^10 = 1.97× in retirement, which is almost double.

Consequently, the full-time adult learner pursues education at a massive opportunity cost. It is important for learners and educators to internalize this knowledge and act accordingly. If Americans desire the overwhelming, comprehensive advantages that high socioeconomic status (SES) delivers for themselves and their progeny, then as adult learners, it may be necessary to curate their programs of study with actuarial ruthlessness.


References (Note: Certain references are only included in the narrative as hyperlinks)

United States Census Bureau (2009). Educational attainment in the United States: 2009. Retrieved from http://www.census.gov/prod/2012pubs/p20-566.pdf

Hansman, C. A., & Mott, V. W. (2010). Adult learners. In C. E. Kasworm, A. D. Rose, & J. M. Ross-Gordon (Eds.), Handbook of Adult and Continuing Education (2010 ed.; pp. 13–23). Thousand Oaks, CA: SAGE Publications. Retrieved from http://www.sagepub.com/sites/default/files/upm-binaries/34503_Chapter1.pdf

National Commission on Adult Literacy. (2008, June). Reach higher, America: Overcoming crisis in the U.S. workforce. Retrieved from http://files.eric.ed.gov/fulltext/ED506605.pdf

No Magic in the Power of Compound Interest for Personal Finance, etc.

The U.S. stock market produces about a 7% inflation-adjusted annual return, on average. Consequently, the return on an investment in the whole market (or even an index fund of just the S&P 500) over a number of years can be approximated by the equation FinalValue = Principal × 1.07^Years. This fact is frequently used to show the impressive growth in an investment over time. For example, if a 25-year-old invests $50,000 in Vanguard’s VTSAX index fund, s/he would have about $50,000 × 1.07^40 after 40 years (Age 65) = $50,000 × 14.97 = $748,723. The same amount invested at Age 18 would yield a higher multiplication factor of 1.07^47 = 24.05, leading to a balance of about $1,202,285 at Age 65. If, however, one invests the $50,000 at Age 35, well… 1.07^30 is a measly 7.61, which is only $380,613.

The stock market actually yields somewhere closer to 11.69% in nominal dollars on average, but the 7% figure is inflation-adjusted and somewhat conservative… Over 40 years, 7% returns yield 14.97× while 11.69% returns yield 83.29×. At first glance this might seem wrong, but only if you don’t notice the multiplicative element of 1.1169 × 1.1169 × 1.1169 × 1.1169 × 1.1169 … et cetera. Consequently, investing in the stock market at 7% annual average yield versus a CD at 1% annual yield is not just seven times better… It’s seven times better on average over a single year. Over multiple years, not only do the benefits of investing in stocks grow far faster than linear addition, but risk also declines. As a short-term investment, stocks are quite risky, but if you are investing for 40 years… there is much less risk. Our $50,000 invested at Age 25 at a 7% annual yield grows by 15-fold; at a 1% annual yield… well, 1.01^40 = 1.49-fold, which is a pathetic $74,443 versus a monstrous $748,723.

So, 7% versus 1% annual yield yields a 10-fold difference over 40 years… but that’s with the principal included. If we deduct the principal of $50,000, it’s $24,443 versus $698,723, which is actually 28.6× better. This is a legitimate mathematical maneuver, because obviously we don’t want the principal muddying the calculation… If it was one year, it would be $50,500 vs. $53,500 which is only a 1.06× difference with principal included, but a 7.00× difference if we just look at return on investment (ROI).

However, the power of compound interest too often becomes a demotivating counterfactual for people in middle age… or perhaps even people in their late twenties! The “magic” that happens here is not magical—it’s just exponential growth, or, literally multiplying the same number, the annual yield factor, over and over. That is to say, the compounding (exponential growth) curve remains the same regardless of entry point. At 7% annual yield, you could invest $50,000 at Age 25 and have $748,723 at Age 65… or, you could invest $53,500 at Age 26 and have the same result. If you enter the curve at Age 35, you would need to invest $50,000 × 1.07^10 = $98.357.57 to have the same result at Age 65 as investing $50,000 at Age 25. Of course, this oversimplifies risk, which is lower by investing in stocks for longer periods, but as long as you are over 15 years or so, it probably doesn’t make much difference… albeit, at Age 50 you would need $271.371.63 to get to $748,723 at Age 65… but that is still a tremendous return of 2.76× (or, 176%).

Because the exponential growth curve remains the same regardless of entry point, larger investments in middle age can make up for lack of investments in youth. As a corporate shill, one’s income tends to greatly increase in middle age, so it is not “too late” for you to achieve financial freedom in old age, provided you aren’t prevented from investing by the materialistic lifestyle that flushes every dollar you earn down the toilet. (Credit card interest compounds the same way, but against you, and often at 20% instead of 7%.)

Taxation aside, disconnecting exponential growth from your age is useful, because the two don’t actually have anything to do with each other, mathematically speaking. If Alfred Nobel puts $50,000 in a VTSAX trust fund, in 100 years the account would be at $50,000 × 1.07^100 = $50,000 × 867.72 = $43,385,816… and that’s an inflation-adjusted figure. But, recall that he could also put $748,723 in for 60 years and still wind up with $43,385,816. Not magic at all, but just a property of exponents.

Notice of Intent Not to Complete Financial Literacy Course

I’m not going to complete my online, self-paced, self-graded Introduction to American Personal Financial Literacy course, which is about two-thirds complete based on the March 2016 outline. I also won’t be completing nor publishing the Udemy draft course.

Originally, I intended to complete the course as part of my Capstone projects for my Applied Learning & Instruction M.A. at University of Central Florida in the spring 2016 semester. However, in March 2016, my professor was so impressed with my draft submission that she said I didn’t need to do any additional work to graduate. I intended to complete the course later, initially by April, then June, then August, and then December 2016, but did not actually take any action after the 2016-03-23 draft.

In the Education Ph.D., Instructional Technology program at University of Central Florida, I am learning about instructional systems design (ISD), which reveals that my approach to constructing the course was neither systematic nor aligned. While the literature reflects a need for a financial literacy course grounded in ISD and research on personal financial outcomes, given that I am rather competent and self-disciplined, building such a course obviously doesn’t intrinsically motivate me, because if it did, I would have been actively working on it over the past half-year.

My explicit decision to not complete the course comes late, but does not have to be framed as a failure. In fact, if I had announced up-front to myself and others, after contributing enough to complete my Master of Arts degree, that I had no intention of going any further with the project, the project’s situation would be identical now, sans procrastination and failure to keep my word. I feel relieved I am letting go of any personal pressures to complete the course, and this will serve as a learning experience for me to, in the future, not commit to things I have lost interest in or am not actually going to do.