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WE OFTEN IMAGINE WE know something about the future that’s unknowable—and the result can be costly investment mistakes. Below is an edited excerpt from the new book “From Zero to Millionaire: A Simple, Effective, and Stress-Free Way to Invest in the Stock Market,” published by Harriman House.
“I don’t think the United States is going to survive.”
Several years ago, I was having lunch with a friend in a San Francisco restaurant when he made this confession.
Around us, young waiters brought fair trade espressos and gluten-free bread to customers dressed in relaxed yet sophisticated attire. Near the entrance, yoga mats—rolled up in specialized covers—lay jumbled together like multicolored offerings to the gods of wellness and self-discovery.
I had just said that I was optimistic about the future of the U.S. My friend, apparently, was not.
“The only thing keeping Wall Street alive is the devaluation of the dollar,” he said. “The dollar is no longer backed by gold. The U.S. economy will collapse. There’s no escaping it.”
“It’s been a long time since gold was used as collateral for the U.S. currency,” I replied.
“Yes, but little by little people are realizing that.”
I asked my friend if he was the type to have canned goods in his basement to be ready in case of disaster.
“We have enough food to last a year,” he said.
I took a bite of hash browns. Behind him, a lady was parking a BMW station wagon along the sidewalk.
“Yep, I’m a prepper,” he added with a smile, able to laugh at himself.
“Do you buy gold?” I asked.
“Of course. But you have to buy physical gold, otherwise it’s worthless. I’m in the process of arranging to have the gold stored. By the way, why do you think the Americans are in Afghanistan? It’s for the rare-earth elements. Same thing with Mali…. A few families control the world banking system…. They support Wall Street…. It’s all going to collapse.”
A decade has passed since our conversation. In that time, U.S. stock markets—which account for more than half of the total value of all stock markets around the world—have quadrupled in value, advancing almost relentlessly in line with corporate productivity and profits.
The price of gold is lower than the day when we had our lunch.
My friend was a brilliant guy who worked in the demanding world of San Francisco technology companies. He was a professional who lived in a nice house in one of the nicest neighborhoods in one of the most admired cities on Earth.
Men behaving badly. I’m not telling this story to show that my friend was wrong. I tell it because, if you talk to people about stock market investments, you’re likely to quickly hear fearmongering. “It’s a casino.” “It’s all going to crash.” “Wake up.”
A few years ago, during a Christmas party, a family member told me that a stock market apocalypse was about to happen.
“I sold everything,” he told me, a bottle of beer in hand, the Christmas tree glittering behind him. “The stock market has gone up a lot and is breaking record after record. I have a bad feeling…. I think the next crash will be as devastating as ever.”
A few months later, one of my neighbors mentioned the same fear. “We’re due for a good drubbing,” he revealed.
As it turned out, they weren’t completely wrong. The market did eventually experience downturns in the years that followed. But the market is now higher than when they made these dark predictions.
My sampling is small and anecdotal, I admit. But around me, it’s almost always men who believe their gut will tell them the future of the markets. And, like the examples cited here, they are mostly highly educated men who are competent in their field and have enviable careers.
This hunch that imminent chaos is about to strike can seduce the bravest person and the most experienced market expert. But this hunch is worthless.
Investing is a strange practice, one that has its origin in a renunciation: To invest is to give up spending money now to have more money later. Why do it? In fact, the question should be: Do we have a choice?
Social Security, employer pensions and income annuities were designed to supplement retirement income, not replace it. The number of employers offering attractive retirement plans is falling. And if you’re self-employed or an entrepreneur, you don’t need me to tell you that you must fund your own lifestyle, which will likely last for decades after you stop working.
Investing has risks. Not investing carries far greater risks. Rather than treading water from paycheck to paycheck, buying financial assets allows us to gain freedom—and enjoy it—throughout our lives. Taking a year off to travel, not needing the bank to buy a car or a home, dealing with a costly contingency in seconds, or making generous donations to those in need, are just some of the superpowers that investors possess.
Taking stock. Because investing isn’t taught in school, many people believe that it’s too complicated, too risky or too abstract, without realizing that investing well is extremely simple, and within virtually everyone’s reach.
As a result, many people buy a house or apartment and pay the mortgage without seeing the value of investing elsewhere. They don’t realize that they’re missing out on an opportunity for wealth that is light years away from the gains that residential real estate can make.
If the gains from the sale of a home are striking, it’s because, for most of us, it is the only time in our lives that we are faced with amounts in the hundreds of thousands of dollars or more. Without a point of comparison, the price of a home, even a modest one, takes on an impressive value that never ceases to fascinate.
Investor Warren Buffett bought his current home in Omaha, Nebraska, in 1958. He paid $31,500 for it. His property is now valued at $700,000. But if he had invested his $31,500 in the stock market instead, that investment would be worth more than $23 million today.
Is it any wonder that Buffett has spent his life buying businesses and not villas, and that he has referred to his house as “Buffett’s folly”?
The reason the rich are getting richer faster than the rest of the population is that they aren’t letting most of their net worth sleep in the walls that protect them from the rain and wind. The rich get richer because they buy financial assets such as stocks and bonds.
For a long time, only the wealthy had the means and contacts to invest in these other types of assets. This is no longer true. Of course, having little money is a hindrance to investing, but not an insurmountable obstacle. Starting to invest $5 a day at age 20 can make us millionaires in retirement. Without taking unnecessary risks. Without reading financial newspapers or becoming a finance nerd.
You don’t need to have worn out the benches of business schools to become a great investor. In fact, the further you are from business schools, the more of an innate advantage you have in growing your money.
Books that teach investing in the stock market often assume that, with the necessary tools to distinguish promising companies, investors can build a portfolio that’ll grow nicely over the years. Yet researchers have shown that our emotions and behavior contribute far more to our success than the value of any publicly traded company. The latest studies also show that spending our energy and time looking for stocks that’ll make us richer will, instead, likely make us poorer.
Indeed, it’s more advantageous to buy the whole haystack than to spend your time looking for the needle. What I’m referring to, of course, is purchasing total stock market index funds. Don’t want to trust your unreliable gut? These funds are the way to go.
Nicolas Bérubé is an award-winning financial writer and reporter with La Presse, one of Canada’s largest news organizations. He lived in Los Angeles, California, for seven years as the paper’s first western correspondent, has received a National Newspaper Award, and was a finalist for the Michener Awards, one of the highest honors in Canadian journalism. Initially published in French, “De Zéro à Millionnaire” was an instant bestseller in Canada. Nicolas can be reached at nberube@lapresse.ca.
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Zeke Faux wrote a book about crypto, Number Go Up. This is what the Bitcoin believers say, as the coin is designed to go up in value forever. We know how that ended.
Investing in the stock market and bonds requires a similar leap of faith. So far it’s worked in the USA in the 19th and 20th centuries but there are many other places and times where it has not.
The rational strategy is to invest, but also to spend some money on property and experiences. The number may not go up forever.
Remember that it is possible and in my opinion very smart to pay down a home mortgage AND invest in the stock market at the same time. Then your security and portfolio grow together! A great way to sleep at night.
Diversification between equities, bonds, gold & cash is reasonable. I keep 10-15% in cash depending on the market, 5-10% gold and 20% in bonds. Between SS, pension and interest/dividends, I don’t NEED my investments, but it’s good to know they are there.
If I had done just two things on the equities-side since making my first IRA/401k contributions decades ago, I would be a much wealthier man today:
A problem with overcoming the narrative of doomsday scenarios or other strange investment ideas is that there is usually a grain of truth in the center of them. It is true that the US government has debased our currency through inflation year after year. Milton Friedman pointed this out years ago, and yet it continues, just a few percent every year. It is true that the Social Security program was originally designed to provide a small pension amount and that over many years our generous legislators have increased payouts faster than taxes to support them with the result that the program teeters on the edge. It is true that many companies have difficulties that may result in future stock value declines. All these things are true. And almost everybody can report a true example of “if I had only sold” or “if I had only bought.” These things are not good reasons to bet on an American collapse or a total collapse of the world economy. The best way forward is to save, invest, and repeat. Our markets, with all their flaws, are the best and the most reliable. Save, invest, repeat.
I agree with the first premise of the article: predicting the future is difficult–let’s just say, impossible. The second premise: that the stock market is the best place for all of your money–contradicts the first premise on some level. It is very likely that the stock market is the best place for all of my investments, but, given that I can’t predict the future, there is a chance that it might not be the best place for all of my money.
For me, the answer is diversity–not just a diversity of stocks and bonds, but a true diversity of investments: some real estate, some gold/silver, and, yes, why wouldn’t you want some extra food in your house? If the trucks stop running, you’ll be glad you have it.
Great article and insights. Nevertheless, I have less confidence in the US economy and management of our monetary system. We are borrowing at an alarming rate, printing money like there is no tomorrow.
Hopefully things keep moving along for years to come in the US, and all of us prosper however its always good to step back and do a reality check and not get complacent.
Can you elaborate on how would you do a reality check, when, and what are you going to do(timing?)
I have no expertise in real estate as an investment asset. Some of my peers bought large, beautiful and expensive homes and have enjoyed their market value appreciation. FYI, the current median price tag for a home in Omaha is $278,000. I’ve driven visitors by Buffett’s home over many past decades, and most are underwhelmed. For me, the implicit message from him was to purchase a suitable home in a nice neighborhood which I can enjoy living in indefinitely, and invest the difference in the stock market. Hardly an original idea.
I like your point about emotions. My view of owning stocks (when defined as shares of an index fund, held for a long time period) is that they are not risky. The risk of owning stocks is rather created by unwise behavior, often emotionally driven. Owning enough short term treasuries to fund a sufficient of number of future years’ worth of withdrawals helps me avoid the urge to meddle with my stocks. I enjoyed reading this article, Nicolas!
Since I immigrated to this great country in 1991 I realized that you can make it big by starting your own business or joining the best entrepreneurs in the world thru the US stock market by buying the smart, easy, cap-weighted index, the SP500. This index gets over 40% of its revenue from abroad which means you are invested globally.
This is why I never opened my own business or bought RE(real estate), I already had a good job in IT. All you have to do is be frugal, live below your means, pay all your credit cards on time, and save monthly. The stock market’s long-term performance would take care of the rest.
Yes, telling the future correctly would make mankind a very different race. There are studies though in past events that may help…..
https://topdocumentaryfilms.com/changing-world-order/
The only thing we can be certain of is that the world is a very uncertain, unpredictable place. Don’t get fooled by randomness into believing your certainties are facts.
The key to stock investing is controlling your behavior with a solid plsn
80-100% equity at the outset is prudent over 30-40 yrs in the mkt
We went off the gold standard in the summer of 1971 with the price of gold having been held at $35/oz for a long time. Quickly, the price began to rise. I looked at the return on gold from a month or so later, when the price went up to $41, to 1 Nov 2023 and gold returned about 7.4% annually. The Dow, over that period was up about 7.5% annually. According to the Fed M1, a measure of money supply, went up 8.4% from about Aug 1, 1971 to 1 Sep 2023. I don’t have a good measure for real estate handy, however, housing has only gone up massively since the Fed repressed interest rates in 2009. Before, say, 2003 or so, your house didn’t appreciate as much as stocks.
Given our massive debt and deficit spending, and a Congress unable to deal with it constructively, I think we can look forward to more inflation, more debt, and expansion of the money supply. So, going forward, we must own stocks or we’ll fall behind. Waterfront real estate will do well, and gold always seems to retain its value, or close to it, relative to the dollar. Own anything else, my friends, and I think you’ll fall behind the money printers.
How long have we heard that the debt and deficit spending is going to ruin us? Just look at last year’s predictions. Gold is a terrible investment
Totally.
Between 2010 and 2020 the odds and impact of the FED triggering rampant inflation were both rampant and wrong.
In 2020, investors were convinced that paying high prices for stocks popular with the wider public would make them rich.
During 2021, they thought big tech would be immune to rate increases.
At the end of 2022, they thought recession was a done deal.
By December 2023, they believe the economy is heading for a soft landing and lower interest rates.
Nicolas, thanks for an interesting article. Your initial point, that humans are lousy at predicting the future, is critical in my opinion. Adopting good habits, and sticking to them, is the key.
I’ve never understood buying gold to have for a true economic apocalypse. Food, I get. But who wants to be sitting on a pile of gold at the end? Can one of our knowledgeable HD readers give me a simple explanation of this?
I had a billionaire business client once who kept a safe in his office with $5m in gold. To most of us that’s a lot of money, but not to a billionaire. Unless your billions evaporate due to some global catastrophe. History has shown that gold is a good store of value regardless of anything else. And if you have $5m while everyone else has none, you’re still the richest guy in town.
I wouldn’t bother holding gold myself until I could a) hold enough to be a meaningful amount in the case where more traditional stores of value became worthless; and b) hold that amount and have it be less than 2-3% of my total portfolio value.
I agree. If the world were truly falling apart, nobody is going to give up food in return for a gold bar. On the other hand, I have heard folks say that if, say, we became a nation where they were part of a persecuted minority, perhaps gold would be useful for bribes, as they sought to escape the country. I guess that makes some sense — but it hasn’t led me to buy physical gold.
Gold was widely used as bribes by Vietnamese to leave their country after the fall of Saigon and the communist takeover of the country
Our economy may not collapse as in 1929 because of government printing money but our purchasing power as we’ve seen recently may well nosedive. A scary thought though is our government can take whatever it needs via taxation and even direct confiscation from our bank accounts if deemed necessary.
Even scarier is that politicians try to undo the Constitution, tell you what you cannot read, and what a woman can do with her body. Taxation gives you the everyday services you use. The wasted part of taxation is the salaries paid to our politicans.
Great article. I also believe residential real estate is generally a terrible investment.
I thought Buffett’s folly was the airplane that Berkshire bought so he didn’t have to fly commercial.
I don’t know whether it was a terrible investment, I’ve never bothered to check the numbers, but I was very happy to have a paid off house to live in for the 22 years after I retired the mortgage. True, I had to deal with maintenance, which eventually was one motivation for a move to a CCRC, but I didn’t have to deal with landlords, other tenants and rising rents. It isn’t all about the numbers, peace of mind is priceless.
Some people prepay their mortgage rather than invest the excess, and end upon sitting on a pile of cash instead of investing it.
“Some people” do all sorts of stupid things. Some other people don’t.
I totally agree. I remember my Mom telling her story of being 10 years old and the family was put out on the street during the depression because the bank closed and all their money was just gone. She always stressed the security and peace of mind that comes from having a place to live that you owned.
Very interesting article, very insightful, but along the lines of BenefitJack’s comments, Social Security was clearly designed to be the very base of retirement income, not primary or sole.
When it comes to pensions – only ever applicable to about half the workforce – those with pensions very much view them as their retirement income along with SS, not a supplement. Any additional investing is clearly the supplement. Today that is only about 15% of workers so fortunate.
Even today some workers still put too much stock in SS as their future retirement income. It will be there, but as currently designed living on 30-40% of previous income in retirement hardly seems desirable- even by those claiming to thrive on frugality.
Your basic point about investing is key for everyone, but too often overlooked. In part, I blame that on the complexity of retirement investing created by multiple government plans and initiatives at both the state and federal level.
More people believe in the stock market than gold. One belief is that a shiny metal with a limited supply holds value. Another is a belief is that we own a piece of a corporations and their profits. There’s another belief at play, that money itself has value. The last two beliefs are the ones that rule our current economic system. So I agree with you, not because there is an underlying truth, but for expediency.
However, politics since 2016 show that rules we.thought we stable can be upended when people refuse to follow them. At least for now, the economic system has been stable, but this could change. What has made our system so successful is regulation, and without regulation of markets, including consumer protections, values and beliefs would change. The preppers are right that stability is fragile.
The danger lies in having leaders who do not believe in following rules or regulations if it does not benefit them. We are still dealing with this
If investors read a few good books, they would realize how simple investing really is. As well the markets history will teach them that the markets always come back and are quite volatile at times. Just read Random Walk by Malkiel or The Little Book of Common Sense Investing by Bogle; both classics
Thanks.
You stated: “… Social Security, employer pensions and income annuities were designed to supplement retirement income, not replace it. …”
If those are the supplements, what is the base of retirement income that you envision? And, if your base is investing in the stock market, please explain.
thanks, jack
For most of today’s workers, retirement income is (or should be) based on the money they saved.
Aren’t income annuities usually purchased with saved money?
Annuitizing is far from the only way to derive income from a retirement nest egg. Bond/CD ladders come to mind, for instance.
Also, keep your eye on tontines – a way of creating mortality pools that pay remaining members a percentage of the remaining assets each year until there’s only one member left. This is a centuries old approach that is gaining renewed interest.
Yes, they are, though corporations also purchase annuities to provide income to retiring workers.
Great post, Nicolas. At one point I thought you were going to extol the virtues of real estate investing, until I read your Buffet bit about his views of “investing” in residential real estate. Buffet’s folly indeed.
I think overall the advice is spot on. Every time I’ve trusted my gut I’ve sold straight into a market bottom or bought at a top, and then watched as the market took off or tanked accordingly.
As for how much to put into a total stock market, I think it’s highly dependent on age and life stage, which is something all investors need to keep in mind as they decide their portfolio asset allocation.
For us, our primary home did do pretty well both times we bought one which was sheer luck and the way the market moved. It would be easy to second guess our decision to put 80% equity in both times, but after running the numbers on portfoliovisualizer.com it looks like we didn’t miss out on too much extra growth. And I slept a lot better knowing that if one of us ended up out of work for a period of time we wouldn’t need to sell our house.
So it all worked out. As it has so far for us – which is really the point of your article.
That is a fantastic article, and reflecting back so very true for my personal financial history.
In one sense, I owe it all to the government (and of course allow me to explain!).
When I was first able to generate income post secondary education it was the early 80‘s. Although I didn’t make much I was used to living on nearly nothing. So the IRA tax credit at the time as opposed to the revised tax deduction a couple of years later was just too tempting to pass up. Had that not existed perhaps I would have delayed buying mutual funds and stocks. Thanks Uncle Sam for that magnificent albeit brief enticement!