The First Rule Of Financial Independence: Never Lose Money

The first rule of financial independence is to never lose money. If you lose lots of money, you ultimately lose lots of time. And time is your most valuable asset. Don't go too backwards!

The second rule of financial independence is to never forget the first rule. As one of the founders of the modern-day FIRE movement, it is important to keep going forward on your FI journey.

In 2009, I made myself two promises when I started Financial Samurai: 1) write 3X a week on average for 10 years and 2) never lose money again.

We had just gone through a financial beating where my net worth got slashed by 35% – 40% in just six months. The pain was too much to bear, so I decided to take up writing instead of drugs and alcohol.

I knew that worst case, if I stayed committed with Financial Samurai, in 10 years I'd have the option to escape full-time work. When you spend at least 10,000 hours on your craft, you will have opportunities.

Further, I knew that if I never lost money again, in 10 years by simply earning a conservative 5% rate of return plus annual savings, I'd surpass the net worth that I once had before the financial crisis by at least 2X.

Achieving financial independence takes discipline and patience. But once you get there, you'll realize all your effort was well worth it.

The First Rule Of Financial Independence

The first rule of financial independence states that you should never lose money on your path to financial independence, especially after achieving financial independence. It's not easy to do, but with the proper asset allocation, you increase your chances of at least losing less money than the average investor.

If you lose 50% of your net worth, you need a 100% gain to get back to even. But worse than trying to recoup your losses is the loss of time. The older you get, the more you realize everything you want to do is a race against death.

Once you've experienced financial independence, when your gross passive income covers your desired life's expenses, you never want to return to the salt mines again. Protect your cash flow at all costs!

Ideally, your investments never go down, but we know from history that in any given year, there's a ~30% chance the S&P 500 will end in the red. Therefore, it's almost impossible to never have a down year with any of your risk assets.

So what is a financially independent person supposed to do? The solution is to either completely de-risk, diversify, or have alternative income streams beyond your passive income to bolster potential investment losses.

If you cannot avoid losing money in your investments, then you must certainly avoid an annual net worth decline. The solution here is to buffer your potential investment losses with aggressive saving and additional sources of income.

Financial Independence Archetypes

There are different levels of financial independence. Let me share some examples of various financially independent archetypes I've met. We'll discuss how they plan to always follow the first rule of financial independence.

Financial Independence Archetype #1:

60-year-old couple, $3 million net worth, $90K passive income, $90K total income, $50K expenses

Due to inflation, $3 million is the new $1 million. We've got to move past the belief that having a $1 million net worth means you're a millionaire. A $1 million net worth means you're earning about $30,000 – $40,000 a year in gross passive income. This does not reflect the traditional millionaire lifestyle.

With a respectable $3 million net worth, however, archetype #1 lives a comfortable lifestyle off a low-risk 3% return or $90,000 a year in net passive income from AA-rated municipal bonds.

The 60-year-old couple has no debt and their kids are independent adults. They could increase their withdrawal rate and eat into principal, but they want to remain conservative.

The couple has no desire to work part-time or consult for money. They are happy with what they have.

Since they only spend $50,000 a year, they get to reinvest $40,000 a year to earn another $1,200 a year in net passive income to keep up with inflation and boost their financial buffer.

Their net worth should never go down because there has been a 0% default history on AA-municipal bonds in their state.

Further, within five years, the couple expect to begin receiving an additional $40,000 total in Social Security for the rest of their lives.

Related: When To Take Social Security? Make So Much It Doesn’t Really Matter

Financial Independence Archetype #2:

Late 30s, $10 million net worth, $208K passive income, $80K part-time consulting income, $288K total income, $130K expenses

This couple hit it big when the husband started early at a hot startup that went public after 10 years. At the age of 38, the husband decided to retire and live off the $10 million after-tax windfall after he sold all his company stock.

He married a school teacher eight years his junior. He then asked her to spend more time with him in retirement to travel. They're planning to have their first child in the next two years. They want to do the crazy dual stay at home parent thing.

Because the couple is relatively young, they feel comfortable taking on more risk. Further, with part-time consulting income of $80K a year, they only need to earn about $50K after-taxes to fund their $130K in annual expenses.

As a result, their net worth is composed of: 20% in the S&P 500, 20% in their primary residence, 50% in AA-municipal bonds, and 10% cash.

When To Take More Risk

60% of their net worth will generate about $180,000 in passive income at a 3% rate of return. The $2 million S&P 500 index position also generates about $28,000 a year in dividends due to a ~1.4% gross yield. Add on the $80,000 in part-time consulting income, and we're talking $288,000 in annual net worth increase, or 2.8% +/- any increase or decrease in the value of the S&P 500.

With $2 million of their net worth exposed to the S&P 500, this couple can afford to lose 13% in their stock holdings before their net worth starts going down. They are indifferent about the value of their $2 million primary residence because they plan to own it forever.

Their ultimate goal is to grow their net worth by a stress-free 4% a year. At this rate in 10 years, their net worth will have grown to about $15 million. If there is a particularly rough patch in the stock market, the husband will ramp up his consulting work. He has the capacity to earn up to $250,000 a year in consulting.

The First Rule Of Financial Independence: Never Lose Money

Worst case, they could invest $10 million of their liquid net worth in 10 years in a portfolio of municipal bonds. These muni bonds would yield them $300,000+ in after-tax passive income. Thanks to the Fed aggressively hiking rates, Treasury bonds now yield over 4%.

Even if their expenses grow from $130K to $200K after conceiving a child, they'll still have a $100,000 a year gross surplus of cash flow. This couple is unlikely to ever lose money again.

Financial Independence Archetype #3:

40s, $5 million net worth, $150K passive income, $300K active income, $450K total income, $120K expenses

$5 million is the recommended minimum you'll need if you want to retire comfortably in an expensive city with a child. One look at the budget and you'll recognize this reality.

Archetype #3 is in their 40s with one 5-year old child who began attending private kindergarten that costs $30,000 a year. The couple's total after-tax living expense is $10,000 a month.

The couple is financially dependent and are no longer working full-time jobs after 20 years of grinding away. The difference with this couple and the other two couples is that they have an online business. It generates $300,000 a year in gross income.

The wife started her online store selling a variety of women's goods on the side while working as a Marketing Director.

She read Financial Samurai and thought, why not utilize my expertise at my day job and create something of my own. After all, one of the best ways to get next-level-rich is to grow your own equity.

Solid Income Generation

With a combined $450K a year in gross income and only $120K in annual after-tax expenses, they have roughly a $300K annual gross buffer. Therefore, this couple is willing to take more risks with their investments.

Their net worth is currently composed of 30% in various large cap dividend stocks, 25% in real estate, 40% in AA-municipal bonds, and 5% in a high yield online savings account.

With $1.5M in stocks and a $300K annual gross surplus after expenses, this couple is able to withstand a 20% decline in their stock portfolio before they start losing money.

Using Financial SEER, this couple's Risk Tolerance Multiple is a reasonable 13.8X if using a 35% expected average bear market decline. Their risk tolerance multiple is just just 7.9X if using a 20% expected decline in their stock portfolio.

This couple's ultimate goal is to achieve a $10 million liquid net worth by their 50s. Once they do, they can generate ~$300,000 a year in passive income and hedge against a decline in their online business.

Never Lose Money Again

Unless you're risking other people's money, it's actually hard to lose much more than 20% in a well-diversified public investment portfolio. Yes, we know the average bear market declines by roughly 35% since 1928. However, that's for stock performance alone.

Once you construct a balanced retirement portfolio of stocks and bonds, the volatility declines tremendously. Add on alternative investments, and it may be even harder to lose 35% in any given year.

Take a look at the worst year performances of the following balanced portfolios below. Even with a 60% / 40% weighting in stocks / bonds, -26.6% was the worst annual decline.

Income Retirement Portfolio Asset Allocation
Balanced portfolio historical performance - the first rule of financial independence

Major Point For Financial Independence

If you've actually achieved financial independence or are clearly on your way to financial independence, there's no way you should be risking the majority of your net worth in risk assets. Build alternative income streams.

You are already comfortably happy with what you have. If you are not, then you have not yet achieved financial independence. In other words, your financial independence number is not real if you don't change your life.

We must also recognize that except for 2018, it's been easy to make money each year since 2009. Not only have stocks performed well, but so have bonds, real estate and other alternative investments.

Therefore, let us not overestimate our investing prowess. Confusing brains with a bull market is a dangerous mindset. I've known too many people to take excess risk only to lose it all and then some.

The good thing about the 2022 bear market is that wakes people up from complacency. Complacency leads people to violate the second rule of financial independence: never expect your income to always go up. The second rule of financial independence is also the second biggest financial mistake you can make.

Historical S&P 500 Returns Up To 1Q2019
Historical S&P 500 returns with dividends reinvested

Learn To Be Happy With Enough

The feeling of never losing money is wonderful. We just need to be aware that there's a never ending amount of money to be made. It's okay to love money. But, as soon as we find a way to let go of our desire for more, we tend to feel more satisfied and happier.

Finally, the great irony of following the first rule of financial independence is that you may actually end up making much more money long-term. When you've structured your finances to be bulletproof, you've essentially created your own perpetual trust fund.

It is precisely your financial security that allows you to take more risk. And it is the risk-taker who tends to gain all the spoils.

Related: What Does Financial Independence Feel Like?

Invest In Real Estate To Build More Passive Income

Real estate is my favorite asset class to build wealth and achieve financial independence. However, after owning a certain amount of physical properties, there becomes too much work involved in land-lording.

As a result, one suggestion is to invest in private real estate funds and deals online. This way, you can diversify your portfolio, earn more passive income, and minimize stress. Here are my two favorite platforms. I have affiliate relationship with both.

Fundrise: A way for all investors to diversify into real estate through private funds with just $10. Fundrise has been around since 2012 and manages over $3.3 billion for 400,000+ investors. 

The real estate platform invests primarily in residential and industrial properties in the Sunbelt, where valuations are cheaper and yields are higher. The spreading out of America is a long-term demographic trend. For most people, investing in a diversified fund is the way to go. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. These cities also have higher growth potential due to job growth and demographic trends. 

If you are a real estate enthusiast with more time, you can build your own diversified real estate portfolio with CrowdStreet. However, before investing in each deal, make sure to do extensive due diligence on each sponsor. Understanding each sponsor's track record and experience is vital.


I've invested $810,000 in real estate crowdfunding so far. My goal is to diversify my expensive SF real estate holdings and earn more 100% passive income. I plan to continue dollar-cost investing into private real estate for the next decade.

Recommendation To Achieve Financial Independence

It's easier to achieve financial independence if you diligently keep track of you finances. To do so, sign up with Empower, a free financial tool online. It aggregates all your financial accounts in one place.

I've been using Empower to track my net worth since 2012. As a result, I have seen my wealth sky rocket during this time period.

Their 401K Fee Analyzer tool is saving me over $1,700 a year in fees. They've also got a great Retirement Planning Calculator. It uses real data and Monte Carlo simulations to produce realistic retirement results.

There's no rewind button in life! Let's not waste any more time.

Personal Capital Retirement Planner Free Tool
Empower's Free Retirement Planner

More Recommendations

Pick up a copy of Buy This, Not That, my instant Wall Street Journal bestseller. The book helps you make more optimal investment decisions so you can live a better, more fulfilling life. 

Listen and subscribe to The Financial Samurai podcast on Apple or Spotify. I interview experts in their respective fields and discuss some of the most interesting topics on this site. Please share, rate, and review!

For more nuanced personal finance content, join 65,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. 

About The Author

77 thoughts on “The First Rule Of Financial Independence: Never Lose Money”

  1. Manuel Campbell

    Hi Sam,

    I was reading this article in conjunction with today’s article.

    Like you, I’ve gone through the tech bubble (although I was just starting off) and the financial crisis where I lost more money. Obviously, the worst of all was the COVID-19 crash. This is normal since my portfolio grew a lot along the way.

    I agree with the rule to “never lose money”. But I apply it differently. I try not to care too much about market volatiliy (what is called “risk” in the financial industry), even if it’s hard sometime. I learned with time that the “risk” of a stock price decline could instead reveal to be an “opportunity” if the company is a good one that manage to go through the short term difficulties.

    Instead, my goal is to avoid investing in financially weak companies that seems good candidate for bankruptcy and avoid overpaying for companies that sell for stellar P/E or have no P/E at all. For example, Sears and Radio-Shack were very obvious insolvent companies, while Macy’s and Best Buy had solid financials.

    I’ve made a lot of money with companies that have gone down a lot. Here are some example :
    – Best Buy : bought at 23$ in 2012, the price went down to 11$, sold the majority of my position after the pandemic at 100$. Best Buy had enormous losses from going out of Europe and China, but the US/Canada was very profitable.
    – Abercrombie & Fitch : bought at 11$ in 2017, the price went down to 8$ during the pandemic, but I had already sold 2/3 of my position in 2018 for 27$, sold the rest of my position for 27$ after the start of the pandemic. The stock is now 33$ per share… When I bought, the company was going through enournous difficulties, but the amount of cash they had in the bank account was more than the stock price ! So, this was a great cushion.
    – Applied Materials : Bought for 60$ in 2018 at the market top. The stock immediately dropped to 30$. I doubled my position (for half the price). At this price, the company was generating 10% earnings and 3% annual dividend. This was a no brainer… The company eventually benefited tremendously from the pandemic (as a chip equipment maker). That was totally unexpected. I sold half my position in 2021 for 100$. I kept the other half and they are now worth 150$. Those are equivalent to free shares for me – since the realized gain pay for the remaining shares. And they are still earning 10% per year due to the increase in profits. I don’t know if this will continue in the future when the chip shortage will be resolved however…

    Anyway, those are just a few examples. Each of them are not necessarily big amounts in themselves. But I try to repeat this strategy as much as I can. So this can become a reliable way to grow my investments over time.

    This way, volatility become an opportunity, instead of a risk.

    The COVID-19 made this quite difficult to apply, because it was so unexpected and unpredictable. Some of my investments performed tremendously well. While some others were hurt badly. Diversification helped me a lot in this situation.

    I would want to go back to investing actively when the pandemic is over. This will be easier to do when we go back to some sort of normalcy. Let’s hope it will happen sooner than later. I’m very tired of this pandemic …

    Anyway, love all your blog. Hope what I write make sense. Feel free to comment if I you agree or disagree with this strategy.

    1. The one thing I’ve realized since starting in 2009 is that a lot of people have made a lot of money since.

      Therefore, my fear is that we’ve become overconfident in measuring our risk tolerance and our investing abilities.

      It’s one of the reasons why I wrote, Your Risk Tolerance Is An Illusion. But I’m also hopeful we’ll all learn from our mistakes and get better over time!

      1. Manuel Campbell

        I agree with you. It is always my fear to invest in an overvalued stock market. However, equities don’t have a limit on the upside. It’s not because they have done well in the past that they can’t do better in the future. It’s different than a bond where an increase in price limits any potential increase in the future. Gains on bonds are ultimately capped by the face value of the bond and the coupons.

        One example that helped me understand this concept during the pandemic was looking at the Zimbabwe Stock Exchange (ZSE)… If things were bad in developped countries, then surely things would be much worse in Africa ?

        Here is the most recent data : +345% in 2021. One would think : “this is certainly loss-recovering after a very bad 2020 ?” Hell no ! The stock market is up 4596% over 2 years !! (Here is the link :

        The most important to look at the facts. For that reason, I plan to read as much earnings reports as I can in 2022. That will help me determine if actual prices are justified. If they are not, then I will seriously consider reducing my positions (risk).

        There are many reasons why companies could have a very good performance in 2022 :
        – more stimulus from governments in coming years (infrastructure bills);
        – additional money circulation due to past stimulus (purchases made with stimulus money is now a revenue ready to be spent by another person);
        – additional savings and reduced spending during the pandemic should come back to normal (recovery stocks);
        – potential additional borrowings from real estate appreciation as well as increased spending from stock market gains.

        Reading how companies are doing in their coming earnings report will help me understand what is going on right now and what companies expect for 2022.

        Also, 4 of my 5 biggest positions are relatively secure investments :
        1) Couche-Tard : 61% earnings growth over the last 3 years, PE around 16.5, very high quality company, will probably soon surpass 7-Eleven as the biggest convenience store operator in the world.
        2) Suncor : 5% dividend. 7.7 forward PE. Biggest oil company in Canada. This is the “Exxon” of Canada. Upside potential in case of an energy crisis following years of underinvestment in the production of oil.
        3) TC Energy : 5.6% dividend. 13.5 forward PE. Pipelines. Super stable operations. Almost like real estate. Potential lawsuit gain from cancellation of Keystone XL by Joe Biden worth 15$ per share (25% potential one-time gain).
        4) Riocan : 4% distribution. Real estate. No need for additional description. :-)

        I will stay more cautious than I was in the past. But I’m not sure “cash” and “bonds” are the right answer for safety in this environment.

        We may not get +4596% return over two years, like in Zimbabwe. But my bet is the “sign” in front of the number will be on the same side…

        Anyway, thanks for sharing your thought with all of us. Really appreciated !

  2. Both Bernstein and Swedroe in their writings suggest CASHING IN YOUR CHIPS when you have won the game. I recently invested in PFFD as suggested by author Rick Ferri. It is a preferred stock index fund yielding around 5.5%

  3. I’ve thought about the topic of running out of money quite a bit. I’ve landed on the option of always doing something to earn at least some income. This serves at least two purposes in that you augment your investment earnings and second it gives you something to do.

  4. Thanks for the reply Zen Master. I appreciate your thoughts. I am still learning about how bonds and preferred shares of stocks work. So I do have a question. You said “the corporate bond market is presently stretched, featuring record high debt to GDP and record low high-yield default rates”. Can you say that across the board? For example, I recently purchased some corporate bonds of companies that are in good financial shape, have good management and produce a stable product. If I understand, a company’s bond is the highest priority above their common stock and above their preferred shares. So in order to default, they would have to default on the stocks first. So it seems to me that how stretched the company’s bonds are should be based on the financial stability of the company. I will soon be in a low tax bracket and all of my income will be from my IRA. I do not own any muni bonds. Right now I am about 10% cash, 10% corporate bonds, 30% preferred stocks and 30% real estate and 20% growth stocks. All things considered, I am averaging about 5% yield, which is about where I want to be. But I am just concerned about preparing best I can for the coming recession.

  5. Good article and discussion. When I read most articles about asset allocation, I always get confused about bonds. At least in this article, it’s clarified that you are talking about municipal bonds. However, what do you think about corporate bonds and preferred stocks of the solid companies you have been investing in? As a defense, I have moved about half of my investments to the bonds and preferred stocks of the same companies I have been investing in. That way I have confidence in the company and management because I have thoroughly researched the company. But moving to their bonds and preferred stocks, I get a better dividend and for the most part, less volatility. So what are your thoughts on bonds and preferred stocks of solid companies?

    1. Jim –

      I agree that most people are too generic in talking about bonds. You wouldn’t talk about all “stocks” in the same way, and the fact is various “bonds” are not all alike.

      That said, corporate bonds may differ from municipal bonds in terms of credit risk, call risk, and liquidity risk and — unlike municipalities, which have no shareholders — a company’s management interests and incentives may align more with stockholders, not bondholders. Know what I mean? Worse, the corporate bond market is presently stretched, featuring record high debt to GDP and record low high-yield default rates (both harbingers of a stretched market).

      What if (when) the economy weakens? What if (when) the tide goes out? Will the corporate bond market show greater weakness than anticipated? It seems to me as though the corporate bond market is perched on about as much risk as the stock market. The tide will turn eventually and, in my opinion, these bonds will get hit.

      In my view, the same is not true for municipal (or other government) bonds. Could there be some municipal bankruptcies or defaults? Sure, but muni bonds, in general, are not subject to the same default risk as the corporate bond market and if you’re particularly focused on a diversified basket of investment-grade “general obligation” bonds, you’re going to be fine as long as the entire country doesn’t go under … and then nothing is safe anyway. You’ll want guns and ammo.

      On the other hand, I think liquidity is one of the negatives of muni bonds. The market is much, much smaller than the corporate bond market. Moreover, even in the financial crisis, muni bonds suffered a dramatic fall in value — around 15% versus the stock market of around 50% — but the bonds also recovered quickly (within about 60 days of bottoming).

      Of course, the primary feature of muni bonds is not safety, it’s the after-tax yield. If you are in a very low tax bracket and “no tax” state, muni bonds are not for you as you could do better (i.e., get a higher yield with equal safety) with other taxable government bonds. So the prime candidates for muni bonds are those in a higher tax bracket and/or in high tax states.

      That’s my 2 cents anyway. Does anyone disagree?

  6. Random thoughts;
    I strongly recommend Swedroe’s new book on Retirement. It answers most of these questions on asset mix, Social Security strategies and risk.
    We already live in a hyper-inflationary environment for Health care.
    The ability to “cut back” on expenses is a powerful financial tool.
    Most Armageddon scenarios will be local, i.e. Hurricane Sandy. A 4-wheel drive vehicle with a full tank of gas may be the ultimate survival tool.
    Preparing for unlikely scenarios such as War are likely to be too expensive and ineffective.
    You simply cannot protect yourself from all types of risk.
    The biggest risk to your financial future is your own behavior. Under stress humans almost always make the wrong decision financially.

    Stocks correlate with Bonds? That’s new to me.

  7. Great post and awesome comments.

    I’m an Aussie so some of the terms on here don’t make sense but I love the theory.

    I’m earning $300k pa in wages. I have no passive income as I bought a house for over $1.8m in the middle of SYDNEY. That’s cheap here and the house is a knock down. We are living in it to save so we can rebuild.

    I hate the long hours and stress of my job. It’s tough stuff and I’m thinking of taking a demotion and pay cut for a healthier and happier life.

    43 no passive income. I have $425k in my super fund in balanced option.

    The only way I see financial freedom is to either keep slaving away or sell my house and move to a cheaper area.

    I think I earn good money but I’m nowhere near and of the wealth of the people on the page. How did everyone accumulate so much wealth through being a wage slave? I’m really curious and wondering if you have cheap housing or you have invested young.

    I have a partner with minimal assets and low income but we have no kids and a $60k mortgage.

    Cheers from Australia.

  8. I’ve been trying to follow the ‘don’t lose money’ principle for years. So far so good, the thing is I only started investing at the beginning of the bull market. Not really been into a full blown meltdown like 2008 or ’01/’02.

    I’ve been telling myself since the beginning of 2018, don’t confuse brains with a bull market. So I took the majority of my stock portfolio off the table and put it to good use in my mortgage savings account generating a 4.3% tax and pretty much risk free (a mortgage type only known in The Netherladsn, for which I’m personally very grateful!)

    After the correction in December 2008 I carefully put some money into my portfolio, but taking it slow! As Buffett had said on many occasions, don’t risk what you need and have for something you don’t have and don’t need!

    Good luck!

  9. Money Ronin

    From what I’ve read, the Financial samurai and I share many common investing experiences.

    In general financial samurai tends to skew more conservative than the advice I dish out and live by. I would suggest in each scenario to be more aggressively invested reducing AA bonds and money markets. I’m not advocating zero cash, but at today’s interest rates I increase reliance on lines of credit for that rainy day fund.

    Too many friends live by the “never lose” motto. They move forward but not on track for early retirement which is the point of this site.

    My philosophy is to not fear loss and risk, just don’t lose your shirt. Make sure you are flexible with your expenses. There’s no law that says your kid has to attend a $30000 kindergarten. Or cut that Hawaii vacation if things go sour. Clearly the people profiled are not living on the edge. They should scale up and down their expenses in accordance with their investment performance.

    I was raised middle class. The success I’ve achieved is gravy and beyond anybody’s expectations. If I had to go back to a middle class lifestyle, it wouldn’t be the end of the world.

  10. I am not understanding who are you writing this article for. How about writing an article for those of us without “…$450K a year in gross income…” and with numbers that make sense.

    1. In your opinion, what income “makes sense” and who do you think owns this site? Do the two other examples of making less not fit your desire? If not, feel free to expound on what I should be doing on my site to appease you.

      1. What he is saying is that because he doesn’t make much money, he wants you to adjust your writing based on his lifestyle instead of do more to improve his own worth.

        This is the same type of person who tries to put someone down to make themselves feel better. Don’t bother with these type of losers.

        They cannot get inspired or learn from others. They are always angry.

        1. Gee what’s a pretty nasty response mate. I think it’s a great question Kel asks as the numbers in the examples are very high indeed

      2. Andy seems quite mad at Kel West!

        Anyway, according to the Financial Samurai demographics (, 45% of readers make over $100,000. The median US household income is around $60,000.

        So I take it that “kel west” is just asking for lower numbers & examples for the 55% of readers who are under $100,000.

        With that said, the principles are what matter most. Don’t get too caught up on the numbers provided in the example, Kel West.

  11. Wealthy Content

    I really liked the data under the never lose money again section, but this line really hit me: “The older you get, the more you realize everything you want to do is a race against death”
    Well written Sam!

  12. quantakiran

    I can’t stand to lose money, it hurts and feels like I’ve taken a leap back. And then I keep thinking about how many excruciating hours I have to put in to make it up the loss.

    So I’ve decided to take the very slow (almost equally excruciating) path to FI by doing only fixed deposits. At least it feels like I’m always plodding forward and never stepping back.

  13. Sam,

    Do you have a post about building passive income using municipal bonds? I live in a state with no state tax, not sure what kind of bonds I should target for safe income. For instance, which munis are higher risk and should be avoided. Which states have a history of insolvency? etc.

    Appreciate your advice.

    1. Probably need to swing for the fences more and start building passive income. No idea about this couples expenses and utilization of time. There should be upside to the $80K between two people.

  14. Quality post and interesting comments. I’m in my early 30’s, live in NYC, wife/kids, with a $2M NW. W2 wage slave and imagine will certainly need considerably more to likely feel “comfortable” so I am still predominantly invested in equities to the tune of 80%ish of my NW with the remaining balance in the essentially cash. This is on top of the fact that most of my comp is beta to the market as i work in money management. Hard to materially derisk given I am still so young and in the middleish of my financial journey. I suppose I could throw in the towel and live a “solid” life off 4% plus my wife’s modest income, but that ain’t gonna happen.

  15. A bit slow, from 3/1 9:30 am post

    Do not believe in end of world theories,
    If your right you loose,
    If your wrong you loose.


  16. I’m still willing to lose money even though I don’t need to take the risk at this stage of my life. I’ve been playing the ”game” of saving, investing, and accumulating wealth for 30 years now. I’ve been reasonably successful and have enjoyed my financial journey so far. The extra money will not add any value to my families life. We’re quite satisfied with what we have. However, I enjoy the “game” and I’m gonna keep playing.

    Thanks, Bill

  17. Not sure if anyone has any input. If I’m fine with adjusting my retirement time horizon, is staying 100% equities considered completely stupid? I’m about 1/3 of the way there and in my mid-40s. Theoretically sometime between 8 to 11 years to reach FI; provided nothing crashes super hard. Saving a lot more than before; now at 40% of gross.

    Or, is it time to start being more conservative? I’ve just always been aggressive and not flinched when losing a high percentage of wealth in stocks.

  18. I’m pretty much much Archetype 1. But we don’t feel that compelled to be as conservative with our piggybank. Embracing that we will likely have a bigger piggybank upon our deaths, my kids will be getting most of our money anyway. It’s really family wealth and well being.

    So, since the kids have started working, we have been fully funding their Roth IRAs and their company retirement accounts (Roth 401 when available). Each and every year from day one. It all falls below the annual gift tax limit. The kids are eventually getting the money anyway and both kids are in tune with the overall goal. But they are savers from our teachings.

    I don’t expect them to become spendthrifts with the extra yearly money and they have not. And I can only see getting a larger chunk of money upon my passing as a larger temptation than having it build up over time. My parental role is not to control their actions, but to guide them into adulthood (and in this case, into retirement). So far it all looks great. And I will hold my tongue when one of them comes home with any expensive purchase that I think was a waste of money, paid for with “my money”.

  19. Interesting.. 100% bonds?? The historical rate of return is misleading, we need to look at the real inflation adjusted rate of return of the asset classes. The real rate of return on bonds is much lower. Probably closer to 2% versus the 5% you have here.

    The 100% stock allocation at 4% withdraw rate has the highest long term success rate of not running out of money. If you bump it down to 3.5%, even with the massive short term market swings, in the long run, you’ll be fine.

  20. This is good. I’m a lot more conservative now and I don’t want to lose any money either.
    I exchanged quite a bit of equity to bond and money market fund recently. At this point, we should be able to maintain our net worth if the market drops less than 20%. More than that and our net worth will go negative for the year.
    It’s not a huge deal. If the market drops 20%, I’d rebalance and pick up more stocks.
    The key to not losing money is to have income, whether passive or active. From the 3 scenarios, the income makes a big difference. The more cushion, the better.

  21. Our risk tolerance has decreased as our net worth has grown – we’re not competing against a market return anymore, just a return that will allow us to achieve all of our goals. But you’re right – having a nice pile does open up opportunities and there are even more chances of increasing the pile if you’re game.

  22. One of the best parts about your posts are the comments.

    For me, my total net worth is 3.7 mil not counting primary residence which in the Bay Area is 1.1 mil. I figure I need 100K for retirement. 24k already comes from Social Security so we want about 76k. I am building a TIPs ladder, well not exactly a ladder. I am buying them all through the treasury auction (not the secondary market which is what you would have to do if you wanted a true TIPS ladder) so I may buy two years worth of ten year or 5 year TIPS in the future as the treasuries become available. I buy 5 year and ten year TIPS usually in 200k increments. I buy short term treasuries until TIPS become available always looking at the Treasury auction calendar. I want 25 years of TIPs which will be at about 2.5 million.

    The remaining 1.2 million is what I invest in risk assets. So this allows me to keep pace with inflation and keep my withdrawal percentage at a respectable 2% of entire portfolio. When my wife reaches age 70, she will also be eligible for social security where we will receive 50k between the two of us, and at age 65 she will receive about 8k a year in pensions further reducing what we need.

    So knowing, I have enough to live on for the next 30 years allows me to sleep comfortably while at the same time allowing me to invest in risk assets to hopefully outpace inflation, and manage as a legacy for my children.

    My only concern is a neurological disorder I have but then I think, there is one thing worse than being disabled and that is being poor and disabled.

  23. That is a great first rule. I believe Warren Buffett added a second rule to that…”never forget rule no. 1″.

    Sometimes people won’t adhere to the rule until they have experienced the consequences of breaking it. I remember a decade again when I wanted to juice my investment returns, I started to get into option investment (probably more speculating). I wrote a call option which expired without being exercised.

    It was great, got to pocket the premium. Then with this win, I decided to buy a put option for $35k thinking I would be able to make good money when the stock price corrects after a huge run up.

    I ended up losing the entire investment. The stock price went up and up and I was too stubborn to close out the put when the put price was dropping. Didn’t want to admit defeat at the time.

    That was a very painful lesson. And now I am a true believer of the first rule.

  24. Mr. Hobo Millionaire

    A “down” year is not a “loss” unless you sell. Don’t sell. Don’t ever sell (for sure don’t sell all of your holdings). When it comes time to live off non-business investments, I plan to stay heavy stock (80-90%) and bonds (20%-10%). And I plan on living off dividends only (~2%) from VTI/VTSAX (total market index). I’m not worried about down years/bear markets with that set up. I am one of those believers that the market will always recover and go higher (and if it doesn’t, money won’t be an issue).

  25. Great post, and it validates some steps I took in early 2018 to ensure, or nearly ensure, no net money or net worth loss over a 12 month period. Moved some money from equities to bonds and cash. Also decreased domestic equity exposure while increasing overseas equities, a move that fortunately did not alter the outcome, a small year over net worth gain, the Q4 market dump notwithstanding. My net worth took a hammering in 2008 and 2009, there was no way I wanted to risk that scenario again. Moral of this story: take some winnings off the table, diversify into certain less risky assets, and ensure a net annual loss becomes very unlikely.

  26. Where do you get access to municipal bonds? I want to extend into them but am not sure how and where to buy them.

    The next thing for me is to develop a side hustle. At least for now we saving a lot of our W2 money, so at least we are doing well there.

    1. Bond funds or ETFs are the easiest way to invest in munis. Otherwise you need a broker, a bank, or an online broker and access to direct transactions (somewhat unusual and riskier for the investor in caveat emptor terms).

      1. Mostly agree.

        Although in an ideal world I could pick and choose my own individual bonds, I’m not an expert and do not have the superior buying ability of an institution. Unlike stock buying, bond buying is more complex and not well-suited to individual investors.

        Best bond advice I’ve gotten is to generally stick with extremely low cost, intermediate-term muni bond funds — like VWIUX — with no AMT exposure and which predominantly hold AA or better bonds. Also, if I lived in a state with high income tax I’d also consider (moving and/or) focusing on a state-specific bond fund, but absent high state taxes, it’s not worth the extra cost and lack of diversification.

        On that last point, the default rate for muni bonds is virtually nil and certainly not high enough for anyone to worry about if they are in a bond fund. The fact is, if a diversified bond fund ever experienced a meaningful default, it’s “game over” for everything and “money” will be the least of your worries.

        The only disagreement I have is bond ETFs. Bonds are completely different than stocks and far less liquid. I’m not convinced a bond ETF (like VTEB or MUB) would deliver the same results as a more traditional bond mutual fund and, from what I see, they are significantly more volitile. So, while equity ETFs are fine (in my opinion), I’d stay away from any bond ETFs (with the exception of TLT due to its size and liquidity—but it’s not a muni bond fund).

        One last thing: The ultimate key to muni bonds (and a lot of other investing) is understanding your taxes. If you don’t have a good handle on taxes you’re not doing it right.

        For example, do you know your state tax rate? Do you know what NIIT is? How about the difference between ordinary and qualified dividends? Or turnover within a fund?

        I am in a state with average income taxes but I’m in the highest federal bracket. So my taxes on ordinary investment income is about 5% state + 37% federal + 3.8% NIIT = 46%. Muni bonds cut my tax to about 5% and, if I really wanted to, I could eliminate that by doing a state-specific bond. As a result, my effective return on a muni bond fund at ~2.8% is a highly reliable 4.5% versus taking equity market risk to get 5-6%.

  27. Sam, et al. – I really found this post to be interesting because I am in my late-40s and the vast majority of my liquid investments are in intermediate-term, high-grade municipal bonds.

    I worry that I am too conservative–am I??

    By way of some background, I have a net worth of ~$20M, of which ~$6M is illiquid equity in a lucrative business that makes me about ~$2M per year in gross income.

    As for the ~$14M in “liquid assets,” I have $9M in municipal bond funds and $1M in equity funds, all with Vanguard so they are low cost.

    I own two homes worth a combined $2.5M, a boat worth $500K, and a couple of vehicles.

    Everything is paid for — zero debt.

    I also have $500K in what could be called an “alternative investment,” but it’s really just a side-hustle, requiring very little of my time, and it kicks off ~$200K per year. In addition, I have a website, also requiring very little of my time, which kicks off ~$50K per year.

    My only major expense is I have twins that go to college later year. I’ve set aside money in 529 Plans, however, and that should cover about 50% of the college expense. The remainder will be covered by my income, of course.

    FWIW, I’ve been divorced and while I am in a committed relationship, I’m not legally married.

    Any thoughts?

      1. Thanks, Sam. Thankfully, I’ve already done some of that estate planning.

        Good to know that you don’t see a problem with my allocations.

      2. When I had young children, I was very safe with my money. I had too much risk in my life – a family. My family would suffer if I lost money. At 69 i swing for the fence. My house is paid for. I sold my BMW and bought a Honda. I have clothes I’ll never wear. I don’t drink. I feel i have little to lose. I don’t want to buy anything. I don’t want any more stuff. I invest for the fun.
        After hours and more hours of research, I press the “place order” button. When I am right, I applaud my efforts. When I made a mistake, I take my loss and start the process again. Hard work pays.
        Greed crushed me. I am a better person because of the human lessons the market has taught me. I learned the cost of arrogance. The cost of ignorance. Pride will lose all. The market is my best teacher.

        1. Charles – I think we agree far more than we disagree. I’ll break it down, but I’d really like your views.

          I was a swing trader for many years. Thankfully, most of my trading was a wash and, of course, I’d have done far better just leaving my money in an index fund.

          The stock market taught me the same valuable lessons too. And like you, I have all those “essential things” paid for and–aside from an oversized house (we have 4 kids between us) and nice sailboat–I have fairly generic tastes. In fact, all of our cars are second-hand, most of my clothes are bought at second-hand, and I’ll only fly economy. Oh, and my house and boat are second-hand too!

          Where we part ways is the “swinging for the fences,” and that may just be a personal and/or lifestyle choice. On that note, this comment is also directed at “Bill” below. I believe his point, like yours, is that you still “enjoy the game.”

          Can we talk about that for a second?

          In terms of personal style, trading for me was like gambling. Although ensconced with the mystique of performing fundamental research and/or technical analysis, it ultimately boiled down to “dice rolling.” Moreover, like a drug, it took more and more “risk” for me to feel the “rush” of the big wins.

          [As an aside, I am a former securities lawyer so I have some inside insight to how the markets work too. They are not nearly as rational or predictable as we’d like to believe, and the odds are especially stacked against non-institutional traders.]

          When I started swing trading it was enough to make $500 on a trade. By its zenith, I wanted to make $150,000+ on a trade before I considered it successful. I had many successful 6-figure trades and made money in bull markets as well as during the financial crisis, but to do so I was putting millions of dollars at risk. As successful as I was with those big wins, my cumulative losses (along with taxes from short-term trading) ultimately wiped out my gains.

          Lessons learned? Yes and no.

          I still get tempted. On Thursday last week, for example, I saw LULU was coiled and “ready to pop.” I wanted to buy it but ultimately stayed disciplined–this, however, was only after I began to calculate in my head how much I’d need to buy (risk) to net a huge six-figure gain.

          [Second aside, you can obviously make these huge gains without risking as much capital using options, but if you’re doing that you’re missing my ultimate point. Oh, and admit it — you read the above and immediately looked up LULU’s chart, right?]

          In terms of lifestyle, I have to wonder why you (and Bill) want to swing for the fences at 69.

          What’s the point? I mean that with genuine respect and not as an insult. If, for example, I was bedridden and/or alone without any friends, interests or hobbies, I suppose I could see the thrill of the “place order” button.

          But to me, I long for something more than simply having more–at least I earnestly try to focus on more than “having more.” It’s been a lifelong struggle.

          Now, you may be a very well-balanced human who loves spending time outdoors with a loving family and vast swath of friends and other interests. You (and Bill) may just have a much healthier relationship with “playing the market” than me. If so, my hat is off to you, sir(s). I wish I could be as well-balanced.

          My dream is to get the kids out of college and ultimately have the courage to walk away from my lucrative business and retire to my sailboat. From there I can volunteer, teach, read, write, explore and share the experience with others.

          In many ways, my dream is to be as well-balanced as I hope you are already. To stop obsessing over growing my net worth and simply enjoy life’s pleasures. As I say, that’s still a struggle for me (or I’d not be reading this website) and candidly there’s not much on the internet for “rich people who already have more than enough and need help unwinding from the American tradition of wanting more and more for no other purpose than to accumulate wealth.”

          So when I wonder aloud about having “won the game,” it’s as much a statement that the “game” of accumulating wealth should end sometime. That there’s more to life than continuing to grow your wealth when you have more than enough to sustain your needs and your family’s needs for a lifetime.

          This, of course, is what I am struggling with.

          1. Hi Zen,

            I’m 48 years old and I’m not swinging for the fences. Sam had asked why people are willing to risk losing money when they have sufficient net worth? My response as you saw, was I enjoy the “game.” The portion of my net worth I’m risking I’m fairly confident I’ll never need. If my net worth declines for a year or 5 I’m confident I’ll make it back and then some over any 10 year period. An added bonus is, I get to enjoy the ups and fret over the downs.

            One of the best thing about having money is the freedom it affords us. In my case it affords me the opportunity, among other things, to take a little more risk, without affecting my family’s lifestyle.

            Thanks, Bill

            1. I’m sort of in this camp too. Here’s a scenario:

              Household has net worth of $3.2M and it’s invested in an 60/40 diversified stock/bond portfolio except for a $200k cash cushion. Expenses are $60k/yr. Household net income is $160k after taxes. Each year. that $100k savings is invested in the same 60/40 stock/bond low cost index portfolio. So let’s say the portfolio drops 15% in a given year. Paper losses on the portfolio is $450k. Savings for the year is $100k so there is a net drop in worth of $350k. Why is this a bad thing? To me, it makes sense to continue investing as is even though your net worth dropped.

            2. Let’s assume I’m 50 with a spouse about the same age and plans to retire (e.g. not count on W-2 income to live) in 5 or so years. Let’s also assume one spouse could work 3/4 time to cover the $60k+ living expenses and get health care benefits in really tough times (health care worker in a high-demand specialty so finding a job isn’t that tough). Let’s also assume both will collect Social Security at age 70 and both have worked a long time. If the goal is to strive for a $5M net worth target to achieve the desired lifestyle (but could do with less if the things don’t work out), it seems like a gamble worth taking, no?

    1. Steve Adams

      Interesting example. Looking just at the $10mil in the market and the conservative allocation – even with the 90/10 Bond focus from the table above this account would have still experienced a maximum loss of 9%. So even it has a reasonable probability of a yoy loss once in a while.

      In my experience even a half year loss has a mental impact and those events are even more likely. I think not ever losing money isn’t an area I will focus on.

      In fact I think building discipline, knowledge and skill to allocate safely for my needs will be the first component. Maybe move to 40% public companies, 20% private companies and 40% real estate will be my target mix.

      Then make my real needs adjustable and continue to add value in ways I enjoy with people I enjoy. This will set me up enough for maximum growth, contribution and wealth.

      As always thanks for the great site – really appreciate it.

    2. Any thoughts? Seriously? You’re one of the richest people on planet earth. You’re in the top .1%. You don’t need advice from anyone, lol.

      When you have $20 million, you theoretically could put it under a mattress and still never have zero concerns. That said, I’m not sure why you have so much in municipal bonds when they’re clearly an inferior asset to the stock market on any period longer than 6-7 consecutive years. The longer you plan to stay alive, the MORE I’ve had in the stock market, which as we know trounces returns basically from any other asset class (except select real estate) over longer periods (15+ years).

      I’d put $5 million immediately into high quality stocks (you can do index funds if you don’t want to do any work), and just let that sit for a long time…

      1. Greg – Your point about the .1% is well taken, but I think it conflicts with the other part of your comment suggesting to put $5 million in the stock market. Bear with me for just a second to see if you agree, or tell me if I’m wrong.

        Aside from truly admitting to myself that I’m extraordinarily fortunate and that I really have “enough,” one of my biggest problems in establishing a long-term plan has been appreciating that “I’ve won the game,” and that I do not *need* to take on meaningful market risk any longer. The last part if the key.

        Unlike people who *need* a “60/40 portfolio” to beat inflation and grow their portfolios, I believe that I should be able to live very comfortably without experiencing market risk and concomitant anxiety from losing large amounts of money.

        Isn’t that “winning”? Isn’t that the point?

        Consider some other data-points:

        * Warren Buffett recently said: “It’s insane to risk what you have and need for something you don’t really need … You will not be way happier if you double your net worth.”

        * On 2/11/19, Vanguard Chief Investment Officer, Greg Davis, says to expect 5% annualized for the next 10 years from the stock market.

        What’s the point of putting $5M is the stock market? Even assuming the stock market is not overvalued and/or assuming it may grow at more than 5% annually, what’s the point? Will I be happier?

        Sure, municipal bonds are historically “an inferior asset to the stock market” on longer time frames, but should that really matter to me? I’m being sincere in asking. Why should I take on equity risk when I’m in the .1%?

        Lastly, Sam said it is “financial security that allows you to take more risk. And it is the risk-taker who tends to gain all the spoils.” Although he’s certainly right about the ability to take more risk and the spoils, I think his ultimate point is that the very people who can most afford market risk really don’t need it.

        I think I’m that guy. Am I wrongheaded?

        1. Zen, I’m you with half your assets. I’ve been through all the thinking and self-critical analysis and doubt management.

          Take it from me – you’ve definitely WON THE GAME and are that guy!

          You just need to finish processing it so that you do not make mistakes and take risks you clearly and certainly do not need to take.

          1. Biggrey –

            Thank you. I appreciate knowing that other people struggle with this as well. And this is, of course, not something you can easily talk through with friends or family.

            I’d be lying to say I have it all figured out, but I’m getting there and trying hard to avoid allowing greed and insecurity to drive my investing decisions. While those emotions should ideally never influence investing, we’re all merely human and it’s particularly “insane to risk what you have and need for something you don’t really need.”

            1. Retired@50&LovingIt

              Simply put – my statement to many, many people over 30 years in the business is to “Take on the least amount of risk necessary to achieve your goals.” If your goals are to live a highly enjoyable life without financial worry and you have the net worth to do so, then you have your answer – risk-free or low risk for the high majority of your assets. If your goals are to swing for the fences to achieve sizably more wealth (even though you have the net worth to live a financially worry free life), then you have your answer – invest as intelligently as possible in high risk investment opportunities. I’m the former (with 20% of my investments in well studied, conservative alternatives), I believe you only need to get rich once. And generally, the goal of the rich is to stay so. But everyone should be the master of their own path forward.

    3. Zen, it sounds like you’ve already won the game so there is really no need to continue playing. I respect that.

      However, as a former engineer, I can’t help but optimize and maximize. I can’t imagine a scenario where I need $20M to retire (for some maybe that’s barely enough) so I would take the excess funds and invest in mutual funds, real estate, businesses, etc. depending upon how passive I wanted the investment to be. Any diversified mutual fund or ETF will almost certainly beat the munis over the long run.

      I’m no fan of accumulating wealth for wealth’s sake. Money should have a purpose. For me, I suspect that will involve philanthropy. If I can have “more” with minimal effort and there is a low risk of failure, I would go for it.

      1. Thank you for the response, Money. The timing is good too.

        I’ve been doing some additional reading this week. I read You Should Only Have to Get Rich Once: How to Avoid Toxic Financial Advice and Focus on What Really Matters, by Russell Holcombe, and I also came across this great thread on the topic from ESI Money, another helpful personal finance site:

        Holcombe’s book is very much in line with my original thinking–namely, “stop playing when you’ve won” and don’t be tempted by “financial professionals” to overinvest when your needs are already met. He also busts a lot of myths, particularly the one you hear about all the time online concerning the “inflation boogeyman” and interest rates. He points out that inflation is not so scary and, in fact, people made a lot of money during the high-interest rate early-80s. His bigger point, however, is that taking unnecessary risk on capital to fight inflation is madness–particularly when you do not need to grow your pile. I agree.

        That said, I also agree with you and some other posters here that “excess funds” could be invested more aggressively (more on that below). And, of course, no one would argue that “over the long run” a diversified stock fund will beat muni bonds, but that type of discussion is better directed at those who need to grow their pile. I’d never tell a 20-year old just starting out to put most of their money in muni bonds. But, a 50-year-old who has 8 figures to invest is a different animal.

        One of the commentators in the ESI thread mentioned having a financial “fortress of solitude” and taking more risk with the rest. I liked the visuals of that idea.

        My current expenses are, in my opinion, quite high. They range between $175K and $200K annually, and that’s without any mortgages, loans, or car payments. Obviously, a lot of that is variable and discretionary (quite a bit of travel), but it also supports a family of 6 people. It will be less when I retire.

        My current allocation of 90% in muni bonds generates ~$265K in very safe after-tax income (my 10% equity positions are in tax-advantaged accounts, so they don’t throw off income and dividends are simply re-invested). I know that I’ll have an additional $1.3M to invest by the end of this year and if I was to reduce my muni bond portfolio by $1M and put that in equities, I’d have a combined allocation of 30% equities and an after-tax income of ~$280K per year. I think that is enough risk for me to weather any storm while preserving my financial “fortress of solitude.”

        Glad to hear any additional thoughts.

        1. You could change the lives of tens of thousands by investing in high yield, low cost philanthropy: safe water, teaching money skills to young people to change the trajectory of whole families, food for the many kids anywhere who suffer food insecurity on a daily basis, sponsoring people out of refugee status, low cost housing for the working poor, skills training for 18-year olds aged out of foster care, buy and cancel out crushing medical debt, battered women, etc etc etc…

          You are clearly very good at earning, saving and investing. Perhaps this is where you could find your next huge yield.

          I don’t have your skills, but this would be my dream.

  28. FinancialNinja

    Long term lurker and avid reader of the site!

    Off topic question but what amount would you recommend keeping a checking account balance at? Is 1 month worth of expenses (~$2,500) too much on a bi-weekly pay schedule?

    Would love to hear your thoughts on this.

  29. I disagree. First, owning your own company is a great path towards financial independence and absolutely an excellent opportunity to burn down your net worth. If you’re already FI, great, I agree it makes sense to tap the breaks. But the path there is going to be a lot longer if you won’t take risks. For some, a stable high-stress high-paying job is a good path. But it’s not the only one.

    And then once you’ve amassed enough, a low risk profile is the way to go. But I do think it’s worth keeping in mind that there’s nothing you can do to guarantee your net-worth never declines. Your bond counterparty could go under. If it happens to be the federal government via treasuries, inflation might run ahead of return. Gold prices fluctuate up and down. Passive income streams dry up. Never mind wealth taxes or expensive health issues.

    Is it at all likely that a broadly diversified, conservative portfolio is going to have large losses? No, of course not. But I think it’s healthy to acknowledge where our control ends. To accept that we can lose what we have no matter what we do, but that that’s ok, it’s part of the human condition.

    1. Disagreement is great. I think it’s healthy you are OK with taking excess risk and losing money. Where are you on your financial journey And what are some tips you have to help people overcome loss? Thx

      1. 32, so not setting out but not at the destination either. Haven’t lost networth yoy, but I’ve worked for less salary than I could have found in exchange for equity working at a tech start-up.

        The way I think about it is that priority 1 is minimizing the worst outcomes (e.g. 70, working and broke). But after having some preparation for the worst, I’m trying to maximize the average of all likely outcomes. So pushing 20% of my stocks to bonds might mean I save a couple years of work in the worst decile of outcomes, but at the cost of adding a year of work to the better half of outcomes. It seems like being risk averse at my age reduces the worst outcomes but also ensures that no outcome is particularly good either.

        1. Got it. It’ll be interesting to see where you stand on losing money in 10 years or whenever you achieve financial independence.

          Do you have family to take care of? I’ve found this to be a big variable and blind spot.

          As a startup employee, you’ll enjoy this post:

          I like risk takers and observing risk takers. But I’m too old and tired to take any more risk myself. Go for glory! And if it doesn’t work out, just keep on working.

          1. Wife, 3 year old and a new baby due this month! Which is part of why I’m ok with reasonable risk. If my returns in the long run basically mirror inflation, I’m not going to be able to give much assistance towards college, etc.

            If I have a good decade, the upsides on risk will be reduced, so I suspect I will become more conservative with my money. But I think that’s because of a different set of risks/rewards then now. If you could do it again, would you really tell a 21 year old Financial Samurai to stick mostly to bonds? I think we’re in agreement for people who do already have enough.

            100% agreed on your startup post. I really enjoy the work and my co-workers and I’ve been able to rise up the ranks rapidly so on balance I’ve got no complaints, but I wouldn’t recommend it for anybody trying to maximize networth.

            1. Oh, nice. Congrats and good luck!

              With inflation running at ~2%, I’m fine with 4% – 6% annul returns.

              I encourage 20-something year olds to take MAXIMUM RISK b/c they have maximum time and energy.

              You’ll lose investment money sometimes (30% based on statistics in any given year), but you’ll hopefully make up for it in aggressive savings and income grow and new income streams (examples in post).

        2. If you started work at age 22, you literally started at the bottom of the last crisis. How do you know you aren’t overconfident given the markets have just gone up since 2009?

          Your example is quite typical of the under 35 crowd, which is one reason why the next downturn might be much worse.

      2. Tips on overcoming loss. It hurts. It really,really hurts. For 5 yrs I was lost. Keep breathing and maybe some day you will be ok

  30. I would say I fall in between Case 1 and Case 3.

    Even with the drop in 2018 where my portfolio lost low 6 figures, my net worth still kept climbing (buoyed by large cash infusions from my w2 job).

    The dream for me is to get passive income streams totaling $125k/yr (non-retirement). I’m already there if I include retirement accounts but figure I won’t be able to access it with my plan to retire early.

    If it wasn’t for school costs (private school for my daughter (finishing up grade 8) at 20k/yr and anticipated expenses for funding college) I could easily maintain my lifestyle with what I have coming in (kids do add quite a bit of complications to the financial picture. lol).

    My big dilemma is when I should start de-risking. I doubt I will work past age 53 (bout to turn 48). I’m building more real estate in my portfolio which I think helps de-risk the market stuff and is more stable but 2009 showed that both can go down dramatically.

  31. “We had just gone through a financial beating where my net worth got slashed by 35% – 40% in just six months. The pain was too much to bear, so I decided to take up writing instead of drugs and alcohol.”

    FS, you taking up writing is our gain, and drugs-and-alcohol’s loss. That kind of pain triggers the memory of the taste of tears mixed with fresh gun oil. Liking your takes on risk, it is rare to find an experienced perspective like yours.

  32. Makes sense. I’m almost exactly family 3– but am considering retiring.

    In addition to just stock/bond portfolios its worth considering other asset types for diversification. My favorite permanent portfolio (Adds 25% gold), but there are plenty of other simple, diversified portfolio types that are interesting to consider. This website does a nice job of outlining a bunch of them:

  33. Little Seeds of Wealth

    Sam what do you say to people who argue bonds perform poorly in an increasing interest rate environment?
    I like how bond prices don’t fluctuate nowhere near stocks and maybe it’s a good instrument for people already in retirement who already amass a lot of wealth that can produce decent passive income even with a low interest rate. My bond holdings have been more or less stagnant in recent years.

    1. Step Function

      So did retirees think at the end of the 60s…that bonds were safe. FF ten years later and retirees were eviscerated both nominally and in real terms.

      There is another type of “bond”. It has infinite duration, no counterparty risk, and appreciates when real rates are negative. IF Barsky-Summers is allowed to manifest, this bond should appreciate 8 percent for every point real rates are under 2%. Imagine all the latent appreciation that has been suppressed since 2013 by the London Gold Pool 2.0. And then the party really gets started when the Fed will have to monetize trillion plus deficits as far as the eye can see.

      But I just talk and take no action.

  34. Step Function

    Bonds are historically correlated with equities. The last few decades have been aberration with a central backstop whenever bonds threaten to drop in price.

    What will wipe so many out during the next crisis is that stocks, bonds, and cash will all drop. RE is a leveraged asset class. It needs to realign with incomes.

    1. I love dire prognostications! How are you investing your money if doom is right around the corner?

      Sorry you missed out on gains all these years. It is normal to want the world to crash to catch up.

      1. The 400 hour portfolio. That’s how many hours I spent on the internet before buying one stock in a new portfolio I established. I ended up owning 5 internet stocks and 5 Cannabis stocks. This is diversifation because the two groups of stocks are independent from each other.
        When my internet stocks go down, it doesn’t influence my Cannabis stocks. If I owned 10 bank stocks, I lack diversification.
        I apologize for spelling

  35. This makes so much sense. I hate losing money! I’ve diversified my investments more and more as I’ve gotten older. At first I was a little unsure about bonds because I was so used to having 100% equity, but now I love having a good chunk of my money in bonds and some in alternative investments. Investing is a personal thing and we all do it a bit differently but I totally agree with your points in this post about setting up your assets not to lose money once you reach financial independence.

    1. Step Function

      I suggest listening to Luke Gromen’s latest interview on MacroVoices. He calculates within 2 years the gross interest expense and entitlements on the federal budget will exceed 100% of tax receipts. Remember, the USG doesn’t use GAAP. Unfunded liabilities are off balance sheet until a Boomer makes a claim.

      Luke thinks within 6 months of this happening the FX markets will sniff this out and the Fed will have a choice. It’s no accident Powell had to field questions about MMT and Fed solvency during the latest Humphrey-Hawkins hearing.

      Take home message…stay away from bonds. Yes, there is an equity bubble, a RE bubble, corporate debt bubble, but the mother of them all is sovereign debt.

      In 97 a hedge fund was bailed out and the Fed saved the counterparties ( GS, JPM, MS, etc).

      In 2008 an investment bank failed and the Fed saved the government by placing risk on the central bank balance sheet.

      In 2021? How does a senior central bank save itself from insolvency? Hint: look at what is the line item number one on the balance sheet. Why have all other CBs repatriated this particular asset? Why did the Us Army seize 50 tons from Syria?

      But I just like to predict the world is ending because I missed out on 10 years of gains and am very bitter.

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