How Passive Investing Saved My Life

Passive investing saved my life in many ways, but not in the way you think. It didn’t swing from the trees like Tarzan and snatch me away from a charging Rhino nor did it give me a Flu shot. It did it in two main ways: Saving my time and avoiding costly mistakes. How? Read on my friend, read on.

I know many people that lived through the Real Estate boom and implosion in 2008. My wife and I bought our first home and first rental property back in 2004 and 2005. Prices and values were going up and up and we managed to swing these two properties financially. I was also trading ‘machine-learned’ market models to help my trend trade Forex and some stocks. I thought I had found the means to a quick retirement and wealth. Everyone thought they did.

I was wrong.

First the Boom, then the Bust

When the Real Estate bust happened, it wiped out friends and colleagues. Luckily we had the rental property rented out and it was generating enough income to cover all expenses, so we operated at break even. A friend of mine blew out spectacularly. He nearly lost everything and is now – 10 years later – finally recovering.

After all the injection of money from the Federal Reserve and the backstopping of the financial institutions, the markets stabilized. Not until after trillions of dollars of wealth evaporated. I don’t need to go into a history lesson here, but it was the closest this generation ever got to a Great Depression.

My 401K shrank, my Forex models blew up, my stock models stopped working, my office was close to shutting down. It was horrible but it was the best thing to ever happen to this us and this generation.

Cynicism and Clarity

I hear it all the time, the Millennials aren’t investing in the stock market. How are they going to save for their retirement? Why aren’t they stock trading like their parents? They’re just passive investing and it’s costing us money!

The Millennials are cynically, and rightfully so. This generation of people apply logic and well thoughtful arguments to cut through the bullshit. They see Wall Street’s game and don’t want to play it UNLESS it’s on their terms. That’s clarity and good for them. They know the system is rigged.

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Rigged System – Long Term Investing

It is rigged. The entire stock market is rigged. Howard said it best here:

The markets rarely frustrate me but the players do. I invest and trade assuming the markets are rigged…because they are.

The markets are one big reflection of a hidden shit-show run by shit people. Ok, I’m generalizing here and there are some good people in the markets but for the most part, it’s one big scam meant to separate you from your money. Usually via fees but often through bad investment decisions.

Here’s a few off the top of my head:

-Brokerage Fees

-Trading Fees

-Expense Ratios (Fees)

-Management Fees

-Hot Stock Tips

Like Howard, I don’t hate the markets at all, I just want to outsmart the masses. I didn’t know how until I read this book, “A Random Walk Down Wall Street.”

The gist of the book? Long-term investing always wins.

Long Term / Passive Investing

A Random Walk Down Wall Street takes a data-driven approach to the markets and shines a light on all the ‘hocus pocus market participants believe in. Elliot Wave, Technical Analysis, Day Trading, etc. Can you make money using Technical Analysis, sure. It might work now but won’t work at some point in the future. How about Elliot Wave? Of course, a broken watch is right twice a day.

Investors get tripped up when they do stuff like Day Trade. They churn up fees, make some money, have to pay taxes, etc. Then one day the market turns against them and they give back a lot of the gains. I’ve seen many a ‘day trader’ blow up and this one is a classic. Yes, there are ways to limit your exposure by stops or risk size positioning but sometimes you need a blowout to reevaluate your choices.

Markets are great teachers if you only listen and learn.

I switched from active trading to passive trading around 2010. I stopped chasing stocks and forex markets after my models blew up. I realized that I was just being lucky. A rising tide lifts all ships and I mistook luck for brains.

Instead, we started maxing out my 401K’s and IRAs. We saved up more money in our accounts, paid off debt where applicable, and remodeled our kitchens and bathrooms.

The Advice

I took the advice of the book and started to do the following:

  • Invest in index funds
  • Buy funds with low-cost fees
  • Don’t market time
  • Dollar-cost average (easy to do in a 401k)
  • Assemble a portfolio that is diversified across many assets
  • Adjust my portfolio based on my risk tolerance and age
  • Sit on my hands
  • Turn off the screens and focus on my hobbies

Well, number 8 isn’t in the book but the first seven are. Once I started doing 1 through 7, I started doing better. I sat on my hands because I realized that I suffer from market panic just like everyone else. I wanted to time the market and look like a hero but that’s just luck. Like right now, there’s a Wall of Worry in the markets, I call it the Trump Trade. No one knows which way the market will go in the short term but in the long run, it goes up.

Do I own a few individual stocks? Sure but that’s really mad money for me. I barely trade and I save money from not creating taxable events and commissions via my retirement accounts. I have more time to spend with my family and invest my time with them, instead of staring at a screen and building models that may or may not work. If the market goes down? So what? I’ll just buy more shares in my funds when my 401k contribution hits.

So what if the Markets are rigged? People have such a short attention span with everything that they can’t see that long-term and passive investing is the way to success. It has been for me. I can sleep at night knowing that I’ve saved time, money, and stressing about the future.

The Sages at Reddit

I’ve been updating my Python Forex Trading Bot tutorial with new trading classes for my readers to try out. No matter what I code and try, my bot keeps losing money. These results reinforce my beliefs on passive investing.

Then I stumbled across a post in r/AlgoTrading

I find that passive investing does just that, especially if you’re diversified. You don’t know which stock will do well but a basket of them will probably do well in the long run.

This sentiment is what Jim Simon alludes to in his ‘fallow ground’ comment toward the end of the TED Talk. His hedge fund has pretty much cracked the Wall Street code through mathematics and simulations. If I had another lifetime, I’d become a mathematician and try this.

My Passive Income Rose 500% Last Year

I used to write a lot about my Dividend Investing and Passive Income Experiment on my other blog, Neural Market Trends. I decided to stop writing about it there because it was diluting what that blog was about, machine learning and AI.

Heck, I haven’t been writing much about that topic since I started writing here and on Medium over the summer. So it was a surprise when I got a notification that my investment statement was ready and I noticed a big number in the dividends column.

So I decided to bring the conversation here, to this blog, and see where it takes me.

In 2021 I started to allocate some of my savings into stocks, ETFs, and mutual funds that generate dividends and income. I’m at the point in my life where I have built up a decent nest egg and have been lucky to ride the tech growth boom.

I’m trying to retire in 9 years — hopefully, sooner — so my investment strategy has shifted to more of these dividends and income-producing assets. Granted, I have to pay taxes on them right now — and I’m OK with this — I’m just plowing back all the gains into more shares.

For dividends only, I increased my passive income by over 500%. This number is higher when I add in the capital gains distributions but I’m just focusing on dividends right now.

In 2020 I made $1,079 in dividends and in 2021 I made $6,079.

Dividend Summary
Dividend Summary Chart

Granted, I can’t live off of $6,079 BUT the experiment showed me that with due diligence, thoughtful planning, and reinvesting, I could eventually live off this without touching my invested capital!

DANG folks! This is real passive income!

I started this experiment because, at the end of 2020, my partner read off her the number of dividends her retirement portfolio generated that year. It was to the tune of $50,000.

$50,000! Holy crap Batman!

That sum of money is nothing to sneeze at and quite honestly is a livable income in low cost of living areas of the United States. Hell, you could live like a king in places like Costa Rica or Thailand on that income.

Generating passive income to live on is doable. I was always told it was but seeing is believing and I’m going “all-in” in 2022.

Read my 5 Tips to Building a Dividend Passive Income Portfolio post on how to get started.

Ray Dalio’s Pure Alpha Fund

Ray Dalio’s Pure Alpha Fund returned 14.6% for 2018. That’s an amazing feat considering the majority of hedge funds averaged a loss of 6.7%. How does he do it? Simple. He always asks, “how do I know I’m right?”

The Westport, Connecticut-based firm is the world’s biggest hedge fund with about $160 billion in assets. The gains for its Pure Alpha Strategy came as other fund managers were whipsawed by volatile markets, resulting in the industry posting one of its worst years ever.

Via Bloomberg

How do I know I’m right?

I can’t begin to guess how his Alpha Funds works internally, how complex it must be. If his book is any indication (a great summary here), then I can guess it’s well thought out with one simple premise, “how do I know I’m right?”

Think about it, 1,000’s of Hedge Funds are operating on similar strategies all the time. They’re either macro, long/short, arbitrage, whatever… What does he do that’s so different than all the rest? The nugget of truth is in his in Ray Dalio’s questioning himself all the time with “how do I know I’m right?”

If you believe the market is going to crash when it’s at an all-time high, how do check yourself? How, in your infinite wisdom, do you test and confirm that you are correct and the 1,000’s of fund manager and quants have it wrong?

History Rhymes

Another great aspect of Ray Dalio’s strategy is that he looks in history where a current similar situation has occurred. According to him, he goes back about 500 years in economic/political/cultural history and looks if something similar (debt crisis, tulip mania, etc) has happened and what the outcome was. Then he adjusts his strategy accordingly.

One great example was when the US abandoned the gold standard in 1971. His initial thought was that the market was going to crash but was shocked to learn that the markets opened higher. Later he learned that history is littered with a few examples where this has happened before. The inflationary result of abandoning the gold standard lifted asset classes higher.

While history doesn’t necessarily repeat itself, it tends to rhyme a lot. Perfect current example: Bitcoin. Bitcoin is a lot like the Tulip Mania (and other manias for that fact). While I’m bullish on Blockchain technology, I’m not sure if Bitcoin will survive to become a sorely needed digital currency.

No matter what industry you come from, you should always ask yourself if you’re right and how can you confirm it. Once you’ve identified the known-knowns (the market already has), the known-unknowns (maybe the market has), and the unknown-unknowns (no one has, but history might provide a guide), then you can apply strategies and processes to win.

Now, ask yourself: How do I know I’m right?

Masters in Business: Ray Dalio

I was listening to this on a trip to the airport and found it to be one of the best interviews I’ve heard on Masters in Business. I went back to rewatch this and write down my notes.

  • Formed Bridgewater in 1975
  • Big US loans to Latin America, thought there would be a debt crisis
  • Mexican default, thought it was the beginning of the end but he was wrong
  • Fund crashed and burned
  • Let go all 8 people, had to borrow $4000 from father
  • Rebooted Bridgewater in 1982 after he messed up and lost a lot of money for investors
  • Started thinking about “how do I know I’m right?”
  • Rebuilt with an idea meritocracy
  • Deal with risk and challenge all ideas and assumptions
  • Write it down
  • Write it down when you’re right and wrong, do it clearly
  • Once you write it down, you can codify it.
  • Ray calls them recipes
  • Helped engineer Chicken McNuggets, the hedging for feed prices and chicken prices
  • Everything is a cause and effect in the markets and live
  • Whenever he got surprised it was because it didn’t happen in his lifetime but it happened before.
  • Once you understand this, you can write your rules for dealing with reality
  • If we don’t spend time on the cause and effect, we just argue until we’re blue in the face
  • With technology, you can apply these rules all over the world
  • Was surprised (didn’t know) that when USA abandoned USD to Gold peg, thought the market would go lower. It went higher
  • Then learned about money breakdowns and realized that markets go higher
  • Must become a student of history, studies everything that happened in the last 500 years
  • Always write things down, do this diligently. It will help you codify your principals
  • Idea meritocracy = meaningful work/goals + meaningful relationships + radical truthfulness + radical transparency
  • Think differently than the consensus and be right

The biggest takeaway for me is that writing it down is KEY! Ray writes everything down, the good the bad and then reflects on it. Writing it down is one thing, learning from it is completely another thing. That’s the key!

I keep a work journal (Medium toll gate) and been doing it for years, but I’ve never thought about writing down my mistakes and successes and then reflecting on it. I should apply that to all my aspects of personal and work life. Wow, mind expanded. Thanks Ray!