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[ad_1] As a general rule, Mr. Money Mustache avoids reading the daily news and ignores the fluctuations of the stock market. And he advises you to do the same thing. The negative factors of wasting your time, diluting your precious brainpower, and creating undue stress by worrying about things outside of your circle of control far outweigh any slight advantages you might get from the tiny slice of news stories that are actually useful and relevant to your daily life. But on very rare occasions, something will squeeze its way through the News Sphincter that is worth addressing, and last week I learned of one of them. The basic idea was this: Image source: BloombergIf you’re not a finance nerd, the phrase “Like Subprime CDOs”, just means “really bad”. Michael Burry, who in my opinion is a relatively brilliant and well-known financial figure, voiced his concerns that we may be inflating a big bubble by concentrating too much of our money in passively managed index funds. And because I have been telling you since the beginning that index funds are the best way to invest, my email inbox and Twitter feeds started filling with concerned questions and links to his interview on Bloomberg, asking if we should be taking this seriously. So is it a big deal? Should we be worried? The quick answer is No. And we’ll get into the full explanation below, but first let’s do a quick review of Index Funds in general. Why Index Funds are Great Index fund investing is both the simplest and the highest performing way to invest your money. It’s as simple as getting any brokerage account and buying the Vanguard Exchange traded fund called VTI, or getting a Betterment account and setting your allocation to at least 90% stocks. It’s the ultimate win/win because you just set it and forget it. Both the math behind it, and the historical performance for the past 40 years (since the invention of index funds) has proven this out. Yes, a small percentage of actively managed funds have beaten the market, and a larger percentage have trailed the market. But this over and underperformance itself tends to be random, and today’s winners often become tomorrow’s losers. A bowl of actively managed funds. Can you pick the winner? And here’s the real problem: you can’t predict in advance which of these horses you are betting on. So your best bet is to ride directly in the middle of the pack, while minimizing the fees you pay for the privilege. But suddenly, Michael Burry says we are reaching the point where this model may soon stop working. So who is right? Mr. Money Mustache or Michael Burry? Have I been naively misleading you? And what about the reassuring words of Jim Collins in his book The Simple Path to Wealth or rather amusing Guided Stock Market Meditation he put up on YouTube? Is Jim full of it too, in light of these new comments from a financial expert? Now, we are already treading onto thin ice here, because similar stuff is in the news every day, and most of it is junk. Financial ‘experts’ are a dime a dozen, and just because somebody got something right once (in this case predicting the 2008 financial meltdown), doesn’t mean they will be right in the future. Because the financial news industry is powered by profits which come from clicks and traffic, their job is to shock and worry and distract you as much as possible so you will click your way through more of their bait. Within the context of that single Burry interview, for example, I saw the following bits of “Breaking News”: Big gain! (never mind that aside from meaningless fluctuations, the market has gone exactly nowhere in the past nineteen months since January 2018) Down Six Percent! (Oops it was back up to those highs by the time I checked) Triple digits! (oh, wait, that is less than a third of one percent because the index is about 27,000) Volatility! Impact! (oh wait, that is all just the random fluctuation it always does and it means absolutely NOTHING to you as an investor) NONE of these things are the least bit newsworthy, and they shouldn’t even be mentioned in a footnote, let alone labeled “Breaking News.” So, stock market reporting is silly, and predictions of doom should be viewed even more skeptically. Because the nature of our economic system assures that virtually 100% of predictions of financial doom will always be wrong, because we are not really all doomed – the future is very bright. However, I’ve read a lot of Mr. Burry’s writing and have more respect for his analysis than that of permanent fearmongers like Peter Schiff or Dmitri Orlov. So I pay attention to his opinions, even when they differ from my favorite permanent realist-optimists Warren Buffett and Bill Gates. So the summary of his argument is this: Passive investing tends to distort the prices of individual stocks, because we buy everything in a fixed ratio without considering the value of each company. The “exit door” is small – there is a lot of money invested in fairly small companies whose shares are not frequently traded. So if we all tried to sell at once, we’d have way too many sellers and very few buyers. This would cause a massive price crash in the stock prices of these small companies. There are some complex bits under the hood of index funds – things like options and derivatives that can break under stress and cause money losses or more volatility. Now at this point, the stock traders and active fund managers are probably cheering and jeering at us: “YAY! Told you all along – come back to us where you belong. We are well worth our much higher fees because we are gonna beat the market! Just look at this cherry-picked data from the current ten year bull market!” But instead of picking a fight, let’s just

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[ad_1] My son and I are having a beautiful Saturday night here at home. The sun is setting over the mountains outside my bedroom window and I’ve just finished baking a pizza which I am about to serve up for his dinner. Although our day has been very simple, there has been an underlying magic within it that triggered an epiphany that I just had to write to you about. Because within this simple moment seems to be the secret to pretty much everything. We woke up to a cloudless blue sky and were treated to summer-like warmth even though it’s November. I served up a French toast breakfast and then we ate together as we made plans for our day. We decided the first stage would be some computer work for him, while I went out to do some yard work and a bit of maintenance and cleanup on my construction van, to get it ready to lend to a friend. Stage Two was our big walk downtown. Little MM wanted to get some shots of old buildings as part of an assignment for photography class, and I wanted to fix a minor leak in the roof of the MMM HQ Coworking building, so we decided to combine the errands. The walk was long and adventurous and we even stopped for some exorbitant ice cream cones on the way, courtesy of a gift card I received for helping someone last month. We got it all done – Little MM got his 24 required shots, I fixed the roof and also ran into my co-owners Mr. and Mrs. 1500 who were setting up the building for a group breakfast tomorrow. So my boy and I strolled the 1.5 miles home through the sunny leafy autumn streets of Longmont and settled in for the night. I popped one of my homemade pizzas into the oven. Because it was a big one, it was going to take at least 25 minutes to cook so I figured I’d use that time to shower off the day’s dust and sunscreen. But then I noticed my hair was starting to get a bit out of control so I gave myself a quick haircut before the shower. And as I stepped out of my room, dressed in clean clothes and feeling sharp and healthy and arriving in the fancy kitchen I built last month just as the oven beeped to indicate the pizza was finished, I realized that this is the secret to wealth. Days like today. Monetary wealth for sure, but also every other kind of wealth. We had just enjoyed an almost perfect day almost effortlessly, just by having the right habits in place. We had a shitload of fun, socialized and exercised and advanced the projects that are important to us. But simultaneously, we spent very close to zero dollars, and left the world mostly unscathed as we finished our day. The beeping of that oven full of homemade pizza was what really set off the epiphany in my head. “Damn”, I realized, “even with all this excess money building up over the years, it didn’t even occur to me to order a pizza. It’s just automatic, and thus faster and cheaper and healthier, to make my own.” Plus by avoiding the delivery I am saving my neighbors from one gas-powered car bringing an unnecessary extra serving of danger and pollution onto our street. It’s a three-way win with no losing involved. Ordering a decent extra-large pizza including tax, tip and delivery: $20Dad’s Homemade pizza: about $4 Difference: 500% Sure, the difference here is only sixteen bucks, but I wanted to highlight the percentage difference instead. Because if you apply this philosophy of efficient, automatic habits all through your life, it really does tend to cut your costs so that your life becomes 2, 3, 4, or even 5 times less expensive. So I thought to myself “WHY does anyone who is not even a millionaire yet, or even worse who has a mortgage or credit card debt, still do something as frivolous and easily avoided as ordering a pizza?*” With that example drawn out in detail, let’s look at some of the other details of this day: New kitchen in my latest frugal fixer-upper house in progress. Even the toaster is fancy! My new kitchen which made that pizza cooking so enjoyable was built on a total budget of about $6000 including changing the floorplan, electrical, plumbing, cabinets, countertops and all the appliances. This is less than half of what custom-ordered cabinets alone would have cost, and a full kitchen remodel of this type usually tops $25,000. But by getting assemble-it-myself cabinets from Ikea and my appliances from Craigslist and doing all of the work myself, I cut the cost by about 75%, while earning plenty of great physical exertion and satisfaction at the same time. Savings: about $20,000 or 80% My son is in the public middle school rather than in the private school across town, which is where some of the other multimillionaire parents send their kids. If the private school were better for his needs, of course we could afford to send him there too. But we gave the local option a chance and it has turned out to be an incredible place for him. Savings: about $20,000 per year or roughly 100% We chose walking as our means of transportation, and if we were in a rush we would have ridden our bikes. This habit of not driving doesn’t just save me gas and maintenance money, it also allows me to keep an older vehicle. I have a 1999 Honda van that is still in sparkling new condition. She just reached drinking age, all cleaned up for her first can of Coors Light! It stays new because I barely use it, because I have designed my life to be within an entirely muscle-powered radius. But this brand-new van is worth less than two grand and insurance is

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