Simple, cost effective long term retirement plan for your kids.

NOT A GENERAL POST ON INVESTMENT ADVICE
I haven’t posted much about investment. I think about it a lot and I research it a lot, but it’s such a tricky subject and so open to interpretation. Also, there is TONS of good (and tons ^ 1000 of bad) investment advice around.

That said, this is one piece I feel really strongly about.


SHORT AND SWEET

I’m not going to spend a lot of time on investment theory, tax optimizations, transaction fees, inflation, value of advisors and the thousands of other topics broadly discussed.
I am going to make one, simple, specific recommendation that I’m doing myself.
Here’s a step by step list:
1) When you have a newborn (or if you currently have a child). Open a simple trading account for them. ETrade, Ameritrade, Interactive Brokers, Vanguard, Schwab, whatever.
2) Put $5000 into it. (or whatever you can somewhat comfortably afford… but 5k is a really good number)
5) When your kids turn 18, convert it into an IRA (or some other tax deferred vehicle, if its possible).
6) Try to figure out how to not have them or anyone else touch it until they are 65 (or whatever normal retirement age is).
7) When they have kids, have them (or yourself) the same thing.
That’s it. Set it and forget it.
I wouldn’t rebalance. I wouldn’t dollar cost average. I wouldn’t track it. I wouldn’t tell my kids about it (until I have to). I wouldn’t include it in any budgeting, etc.
Why?
Because activity and information lead to decisions that work against the long term potential here.
If you’re satisfied or totally dismissive, read no further, if you’re not, read on.

RATIONALE

INVESTMENT PERFORMANCE
Over the very long term, small cap beats all other types of investments. The ride is rocky. Timing is impossible and you can’t possibly do this for money that you will need even over the next couple decades. But over 6 decades it’s likely to produce fantastic returns… as long as you don’t mess with it!
Google all you want. Read all you want. Study all you want. Historically over very long time periods… small cap value just crushes face. That won’t help you if you’re 40 years old and need to retire in 25 years and need a 15% compound return. But if you are 2 and have a 63 year window, and a modest amount of risk capital; It’s as close to risk free as it gets. Since my 2 year old can’t make investment decisions about their retirement 63+ years from now, I’m making one for him.
THE ENEMIES ARE INFORMATION AND ACTIVITY
We love knowing how our investments are doing. Day to day, Hour to hour. Minute to minute. We want to research, we want to tinker, we want to beat the S&P. We think we are smart.
This is not the point here. If I could erase the knowledge of these accounts from my mind (and my child’s mind) and then when they hit the age of 65 (or whatever) they wake up with recall… that’s what I would do. Knowing how these accounts are doing and ANY activity puts the strategy at risk I am not even going to rebalance. The ONLY thing that would make me conduct any activity is if something like Vanguard went bankrupt or got bought or something and I was forced to take some kind of action. Then I’d try really hard to find similar low cost, small cap diversified investment vehicles and reinvest with whatever the asset allocation happened to be at the time.
I can FEEL people talking about how this isn’t optimal for risk management, etc. That’s not the point. I’m optimizing for psychological behavior of myself and my kids. We are short term rationalizing beasts. This strategy is in response to that.
THE SIMPLE MATH
OK. Here’s the exceedingly simple math.
Let’s say you have a baby and you do the above. Historically (since 1930) the small cap value return is 15.4%. If you compound that over 65 years, the result is?
$55,251,945.86
That’s right. doing absolutely nothing else at all, your 65 year old child retiree will have 55 million dollars. Granted. Inflation will chew at the value of that it will double and half many times. It will go through world wars, terrorist attacks, presidential assassinations, and technological changes you can’t imagine. It might not even survive if the whole country collapses. But then, what investment will :).
Now let’s be more pessimistic. At 8% it’s only $743,899. That’s a LOT less, but better than a hole in the head. At 11% it’s a still respectable $4,415,334 .
By leveraging both global and US specific companies in this area I believe my kids will be well served by this trend as the world globalizes or (galacticalizes?).
Basically I give them partial ownership in the global collective of small, innovative, relatively “cheap” businesses around the world over the next 6 decades. I choose Vanguard because I believe as an investment company they are likely to be around a very long time and they don’t charge huge fees or try to be too smart.


IMAGINE YOUR OWN FUTURE OR PRESENT
There are lots of headlines today about seniors who are scared of retiring. The reasons are very real. Failing or inadequately funded pensions… and in many cases no pensions at all. Potential threats to social security. Inadequate savings. Bad investment performance. Fees taking too much away. Etc etc.

I don’t want my kids to face this. Nothing can guarantee that, of course, and ultimately I hope they are helpful, engaged and productive members of society. But I think many helpful, engaged and productive members of society face this terrible future as they age. Sometimes of their own making, sometimes not.

GREAT ARTISTS STEAL?
This is a blatant copy from an idea by a senator named Bob Kerrey in the 1990s called KidSave. I really liked the idea when I heard about it. It was simple. Each newborn child gets $1000 from the federal government put into a savings account managed in the same way the “Thrift Savings Plans” are managed (to avoid “professionals” taking their cut as much as possible). Then for the first 5 years of the child’s life, the $500 (or whatever) child tax credit would go into that account. It’s impossible to withdraw those funds until the age of 65 and they are tax deferred. At 8.5% it was projected that each child would retire with over a million dollars. At four million births per year, that is a four billion dollar government program that essentially wipes out retirement problems forever.

I don’t think it would have worked as planned because the size of that pool of money would have created all kinds of nefarious and unethical practices by public and private sector institutions. And, of course, it requires that the country continue to grow and be successful… but so do all other alternatives. But that doesn’t matter. We can recreate the basic concept.

CONCLUSION
It’s simple, when it comes to compounding interest time matters MUCH more than amount. As a really crazy example, let’s say you go back to the year 0 and invest 1 penny at 3% interest. 2,000 years later you have $472,551,787,558,269,000,000,000.00. Of course, that’s impossible to actually have but it illustrates the point. Small sums over huge periods of time result in big numbers.

Also, please don’t forget to make sure your kids pass that on. The goal isn’t to create vast, indefensible dynastic fortunes. The goal is to promote a simple system that relieves a very basic and fundamental human problem.

Let me know what you think!

How to improve critical thinking: Inversion.

INVERTED THINKING

The idea of inversion was introduced to me by a guy named Carl Jacobi. I heard the quote “invert, always invert” and thought it was a great concept so I dug around to find out who said it.

For a great article on using inversion to solve real problems, you can read this post. If you don’t want to bother the summary is that the problem of trying to keep B17s from being shot down during WWII was looking at bullet patters on the planes that returned and then extrapolating that where there were NO bullet holes must be where the planes are weak (because the weak planes didn’t return).

This is classic inverted thinking. You look at information from the opposite point of view. The absence of data can be more meaningful than the presence of data.

Why is this hard?

Many things work against this kind of thinking. The most obvious one is that we have WAY too much information around us… so it’s unlikely that we will get through this information and find our way to the non-information.

Another reason is that it’s much more difficult mentally. If I show you a pretty graph with nice pictures and well stated text your natural thinking process attempts to understand what is being said. Only afterwards and with much deliberation will you consider what is NOT being said. What we can see overwhelms our mental processes making it very difficult to contemplate what can not be seen.

Why is inversion valuable?

I am a firm believer that value and difficulty tend to be related. Inverted thinking is valuable because it is hard. Because it is hard, less people do it less frequently and thus the insights it can provide are discovered with less frequency. Therefore it pays to practice it on things that aren’t that important, just to get the knack.

I also think it’s valuable because it forces you to look at things in a much clearer way. It tends to be “unnatural” and a bit ridiculous to invert some things… sort of like a child constantly asking why. And yet. It can be really enlightening.

OK. How can I practice?

Well… it’s actually not that hard to do. I’ll take a few contemporary examples.

1) It believe Donald Trump is a self-serving bigot who should never be president.

OK. That’s a sentiment I hear a lot these days. Let’s invert it… and see what happens.

Step 1: Inversion: Assume I believe that Donald Trump is a giving uniter who wants what’s best for people and would be a great president.

Step 2: What would have to be true for that statement to hold? What would I have to believe that I don’t? What would  I have to assume is true that I believe is false?

This forces me to take a position I don’t hold and then imagine myself believing something completely different. That’s the first step to understanding an opposing point of view which is one of the benefits of inverted thinking!

Inversion can be used in goals as well!

2) I want to lose weight and get in shape.

This is a pretty popular and valuable goal that few people attain. Let’s invert

Step 1: I want to get really fat and out of shape.
Step 2: What do I need to do to accomplish that goal? Eat all the unhealthy food I want. Lead a sedentary lifestyle. Avoid the discomforts of physical activity.

That gives me a nice list of things that I would do if I wanted to get fat. That may seem obvious, but I think that when I make that list I find that a lot of it is about delayed gratification and discomfort. Thus, I could conclude that if I want to lose weight and get in shape, I must embrace discomfort and instant gratification.

That’s quite different than buying exercise programs, a gym membership and fancy workout clothes.

Conclusion
So next time you find yourself thinking something that is obvious or seeing something that you are trying to understand, practice inverting it. Why is there rush hour traffic? Why do we pay $5 for coffee? What causes cancer (Mole rats never get cancer)?

Those are all questions that you can practice inversion on.

Is it better to focus on what you want or what you would be willing to give up?

Ok. I know what you’re thinking:

“What does Super Mario Kart have to do with focusing on what you want vs. what you would give.”

Well, bear with me for a few minutes and if you still feel that way, please flame away in the comments below.


GIVE ME WHAT I WANT AND I’LL  GO AWAY

As a species, we spend a lot of time thinking about what we want. Maybe it’s a better job, a new relationship, a fancy car, a dream vacation, more (or less) time with kids, friendlier in-laws; you get the picture.

All this thinking takes a lot of time and energy and often at the end of it we just feel less fulfilled than we did before.

“Ok Hermann, thanks for telling me what I already know.”

Sure thing! I think we all know that this is a giant waste of time and what we should be doing is acting on all those constructive things we know we want to do: grow a garden, learn calculus, take our kids out for a walk, eat healthier and exercise.


THE REAL PROBLEM IS…

…not that we don’t know what we’re SUPPOSED to do; but rather that we can’t seem to do it; at least not consistently. So we beat ourselves up over and over again.

Now we’re double wasting energy. We’re wasting energy thinking about stuff we want AND we’re wasting energy beating ourselves up over it. Imagine if we could just harness that energy into constructive activities.

As a species we’d probably we mining asteroids and colonizing space by now!

But we’re not.

“Wait a minute, I’ve been reading for a bit now and you still haven’t said shit about Mario Kart.”

Ok, Mario Kart.

As a game it can teach us a lot about this problem.

How?

Well Mario Kart requires you to focus on what you are doing, where you are going and being able to respond to rapid changes. It punishes lack of focus. But the designers put a fun little mechanic in the game to unknowing thwart your efforts here. It’s that little  box at the top that contains special items you pick up on the road and that can, hopefully, help you win.

The problem is you can only have one at a time.

So while you’re racing away (or fighting away) part of your brain is thinking about which item you need next. Worse, if you HAVE an item part of your brain is also trying to figure out if the item you have is better than one you might see in the world somewhere. So you’re doing all this comparing and evaluating and thinking instead of paying attention to the road and the things on it.

Now in Mario Kart the options are the same over and over again and so you gain mastery through repetition. Real life is a bit messier unfortunately… and also way less cool and colorful.


SWITCH THE FOCUS

So I think a great way to approach this is to focus on what you are willing to give up rather than on what you want. This helps in a number of ways:

1) The list is shorter.
2) You have a lot more control over what you will give up.
3) It’s way easier to commit to NOT doing things than to doing them :P.
4) Over time you will put much more energy into fewer things rather than less energy into more things.

Let’s assume you think this might be a neat idea, how can you try it?


TRY THIS

STEP 1: GET SOMETHING TO WRITE ON
Once you’ve finished reading this post, break out a piece of paper or type “notepad” on your computer or use some app. It doesn’t matter… some way you can write.

Don’t spend too much time thinking about what to write on for God’s sake or we’ll never get anywhere!

STEP 2: WRITE DOWN ALL THE THINGS YOU STARTED/WISHED YOU WOULD DO, BUT AREN’T
Then write down all the things you are currently doing in your life. Maybe you’re writing a book, learning how to cook, taking tennis lessons, learning how to invest, etc etc. When I did this at first it was kind of hard because it wasn’t obvious that I was doing much. That’s the point. Don’t think about projects that you are regularly doing and making huge progress on. Include ALL those projects you thought about, kind of started, think about doing again, but they don’t really go anywhere. Especially if you think about them at night or in the bathroom when you tell yourself “I should really write more of that novel tomorrow.” That’s the meat we’re after.

STEP 3: MERCILESSLY CULL THE LIST TO MAKE “FORBIDDEN” LIST
Once you have that list, start removing things from it. Commit to stopping those things.
That new garden. Forbidden from doing it.
Learning Spanish? Not anymore.
Becoming a master pizza maker? Nope.

STEP 4: PICK ONE THING THAT WILL BE “ALLOWED”
Then allow yourself to pick one thing from the list that will survive. That’s the new thing you’re going to do.

But we’re going to make it easy on ourselves. We only have to commit for a month and we only have to commit a small amount of time. Try 30 minutes a day. Or maybe an hour 3 times a week. It doesn’t matter. Something that feels easy so that there’s little chance of failure to commit. Then schedule that time.

STEP 5: MAKE A SPECIFIC COMMITMENTDon’t say “I’ll write my book this year.”

Instead say, “every Tuesday, Wednesday and Thursday from 9:00-9:30PM I will do nothing other than write. I’m not allowed to pursue any other things on my want list. If I have time to pursue other things, I’ll write.” 

Then hang up that list of things that you aren’t doing; that’s your forbidden list of things you said you wanted but you never acted on. If you feel yourself wanting to do those things, look at that list and instead work on the thing that survived the giving up exercise. Don’t fret! In a few months those things will get their time if you like.

STEP 6: REPEATThen at the end of the month take a look and re-evaluate. I bet you’ll have achieved more than you thought and you’ll be much more hesitant to switch your focus.


BONUS POINTS

If you can find a “buddy” or someone to do this with, it’s even better. A spouse can be great, but also bad. I suggest someone who is interested in your growth as a person, but doesn’t have a relationship that will be directly effected by your choice. Back when I was trying to lost the “last 15 lbs” I used dietbet and it worked very well for this.


CONFESSION

I SUCK at this. I am an incredibly scatter brained and unfocused person. I love random things and I can spend vast amounts of time on obscure things and then completely switch at a moment’s notice. It’s incredibly frustrating and I’m trying to improve it all the time. I’ve found by having a list of things I am forbidden from doing it helps me focus my time and energy a little bit better and, over time, hopefully form better habits.

What about you? Do you have this problem? What do you do to make progress on things you want?