Government debt doesn’t sound like something for us to worry about. Sure, pundits are always sounding the alarm on ‘budget deficits’, and maybe it’ll have some iffy effects on the ‘economy’ that’ll somehow trickle down and take a couple bucks from our bank accounts. Ultimately, the government’s the one who has to pay it back, not us…right?

Well, technically, that debt is indeed owed by the government, but taxpayers are really the ones paying it. Above all, young taxpayers who have just run headlong into the Covid-19 recession.

Government debt will eat your net worth for lunch. Here’s why, and how to get it back.

1. How government debt works, simplified
2. Government debt’s impact on you
3. Be an investor, not a saver or consumer

A note: this discussion is concerned with finance and economics, not politics.

How government debt works, simplified

The US Treasury borrows money by issuing bonds, which are just IOUs, to anyone who’s willing to lend in return for interest. Then, the funds are funnelled to various parts of the government.

Anyone can lend money to the Treasury — investment banks, pension funds, foreign investors, retail investors, etc. Treasury bonds are issued and traded regularly, and whoever holds the bond is the lender. One of these lenders is the Federal Reserve.

The Fed is the US central bank, or the bank that our banks (Goldman Sachs, JPMC, Citi, etc.) go to. The Fed is independent from the government, has control over a huge amount of reserve cash, and is a major buyer of Treasury debt, especially in hard times when the Treasury needs money.

Right now, the US owes $27 trillion in debt. This is currently 135% of annual GDP, and equal to $210,000 owed per household.

Imagine having more debt than a whole year of income. Or being 7 times as indebted as the average student loan ($30,000). The craziest part is, this is actually debt you’re responsible for paying off, except you don’t get to choose when or how to pay it.

Government debt is your tax

The government’s main source of income used to pay debt is individual income tax. It gets a lot of revenue from payroll tax, but those funds are earmarked for Social Security benefits, and corporate tax revenues are small in comparison. Your household owes that $210,000 in future taxes to the government right now.

Of course, not all the debt needs to be paid off immediately. In fact, most governments follow Modern Monetary Theory, an economic model which argues that debt is not a bad thing — it should be treated as an asset since the debtor can use the acquired cash to invest and grow. As long as the government can meet interest payments, it can keep borrowing more to pay off old loans and just hold on to debt indefinitely.

For MMT to work, however, the government’s revenues must grow faster than its interest liabilities. When the government borrows money, it’s saying, “don’t worry, we’ll make enough from future taxpayers to pay you back.” In essence, the government is borrowing from the futures of young people who will shoulder the responsibility of delivering tax growth. Debt is the next generation’s burden.

This is fine and dandy if the government can invest this borrowed money today to enrich the next generation, so that it naturally receives a larger sum of tax at the current rate. Otherwise, it must raise taxes.

Theoretically, if Treasury bonds were held by public citizens, then no one loses. The government borrows from you, invests the cash to make everyone better off, then pays you back with your own tax money. Unfortunately that’s not what happens. Treasuries are mostly held by institutions, both national and foreign — your tax money goes to them.

It’s going to get harder to pay up

It’s no secret that the US government has been spending far above its means for years, but it’s only going to get harder to pay it from here.

Firstly, the government is incentivized to be short-sighted and keep borrowing more. This is because the economic power earned by the US in the last century allows it to borrow at cheaper rates, and partisanship encourages leaders to prioritize reelection by spending more to make people happy. No one likes a scrooge…but we forget that what White House Santa gives us today, he’ll take back in a few years with interest.

Secondly, the government isn’t using debt entirely or efficiently to enrich the next generation. Even if we remove politics from the picture, the government’s investments in public capital goods proven to have high returns (like infrastructure and unemployment insurance) have been lacklustre.

Thirdly, government debt has skyrocketed in the 2008 and 2020 crises, and stayed at those levels. Borrowing and spending to save the economy and accelerate the recovery is perfectly justified — it only becomes a problem when combined with inefficient use of funds and economic myopia that prevents governments from slowing down the borrowing even when times are easier.

By 2050, the US will no longer be the world’s leading economy. From here, our income growth will slow along with the economy, but the government’s debts and interest will keep growing, and infrastructure will keep deteriorating. It’s likely our generation will bear the brunt of it.

Government debt’s impact on you

Short- and medium-term impacts

Again, generous government borrowing and spending is great in a recession. The massive amounts that the government has borrowed (and will borrow) from the Fed will save the disproportionately affected and speed up economic recovery post-Covid.

However, that money has not been very efficiently used. Most lending facilities are underused, some like the PPP are fraught with fraud, and the next round of fiscal stimulus is still a mystery after months of partisan bickering. There will most likely be many more unnecessary economic casualties in the coming months before widespread distribution of a vaccine, which itself is contingent on a better-functioning government.

The immediate term will probably see more borrowing (i.e. more debt to pay off in our lifetimes). However, the medium term seems promising. The base case consensus is that 2021 will be a year of recovery and vaccine delivery. This will be followed by a ‘roaring 20s’ period through to 2024, where in the wake of the pandemic all the pent-up demand for consumption will flood the economy.

While great for growth and society, such a vigorous spike in activity will likely result in an inflation jump. This hurts us in three ways:

1. Higher inflation makes our income and savings worth less
2. Higher inflation means higher prices for everything, and combined with the ‘roaring 20s’ mindset, will lead us to much heavier spending
3. Higher inflation (and implied interest rates) lowers stock market valuations and potential investment returns

To help stabilize the economy and markets in the sore absence of fiscal competence, the Fed has promised a monstrous amount of monetary support. Amongst these measures is average inflation targeting: instead of trying to keep inflation close to and less than 2% (standard practice), they’ll be willing to let inflation run higher than 2% for the next few years.

This doesn’t sound like much on first glance, but it is. Inflation since 2014 has been lower than 2% on average. With 2% annual inflation, $1000 today would be worth $817 in 10 years. If inflation rises to 3%, $1000 today would become $737. Doing nothing would mean your wealth is likely to naturally (and counterintuitively) depreciate as the economy comes roaring back.

Long-term impacts

In the next few decades, the government will face difficult decisions regarding its debt. There are two scenarios in which the government can keep up with its interest payments: growth and austerity.

In the growth scenario, the government manages to play its cards right, and facilitates rapid economic growth. As a result, the people become richer, and at the current tax rate, pay enough for the government to meet interest. However, this is incredibly difficult — political hurdles need to be overcome to properly direct investment and increase efficiency. Even if the growth is eked out, the resulting inflation would be difficult to rein in.

In the austerity scenario, the government can’t force the economy to grow fast enough to meet interest. As a result, it has to cut back on spending, raise taxes to make more revenue, or (if the political leaders don’t want to draw public ire) borrow even more and send itself down a rabbit hole of debt.

Yes, we weren’t the ones who borrowed the money — the government did, in the name of investing in us, using our future as collateral. Regardless of how effective you think those investments are, we’re the ones who have to pay back the $210,000 either directly through taxes, or indirectly through higher inflation and lower income growth.

Be an investor, not a saver or consumer

Things aren’t looking good for us. So what can we do about it?

The answer is simply invest.

The economy is driven by investment and consumption. On a macro level, the whole system benefits when either increases, but in order for us to personally benefit, we need to invest more.

Imagine having a picnic in Central Park — our net worth is our basket of food, and inflation and taxes from government debt are the ants on the ground. They’ll constantly eat away at the food in our basket, but the returns from investing helps us replenish it, and possibly even faster. Consuming (beyond necessities) is like voluntarily throwing stuff out from our basket, and saving is simply doing nothing.

Consuming is not a sin, but our choices make a huge difference to our wealth in the long run. Even when consuming, think about the value you’re deriving from the expenditure and whether it’s worth the price.

Saving is necessary, and we must have emergency funds. However, whatever we don’t need should be invested. Our banks use our savings to invest anyway, and this contributes to the economy, except we won’t directly reap the benefits — savings accounts at many major retail banks offer 0.01% annual yield. Nowhere near inflation.

If you’re young and fresh in your career, then your wealth-building years are still ahead. Things are already tough for the ‘lockdown generation’, but accumulating wealth will only get tougher from here. Start investing now if you’re able to. It’ll help you get on the profiting side (instead of the spending side) of the ‘roaring 20s’, and give you a headstart on the race against the invisible $210,000 that’s creeping up on all of us.

If you want to invest but don’t know where to start, you can start here. But odds are you know your stuff, and you’re just hesitating to invest given how rocky the markets have been recently. It still won’t be a smooth ride from here, but know that if you’re in it for the long haul, time in the market beats timing the market.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

It’s mid-November 2020 — the US elections have just concluded (at least most of us think so) but the way forward for the markets is still fraught with challenges. Depending on your risk tolerance and time horizon, however, some of these might just be temporary blips. Here’s what’s on the minds of investment managers, and how your portfolio might be affected.

1. Covid vaccine, cases and lockdown
2. Trump and fiscal stimulus
3. Control of Congress and policy
4. Tax loss harvesting
5. Bill Ackman and what it all means for you

Covid vaccine, cases and lockdown

While the election has overshadowed the pandemic in news space in the last two months, Covid is still very real and very damaging. The stock market is now turning some attention back this way.

Pfizer and Moderna have announced that early results from Phase 3 trials of their vaccines have showed high efficacy rates. This is promising for the markets even though everyone is aware of the time it’ll take to manufacture and distribute (apparent in how the Dow pulled back after an overdone rally on 9 Nov when the Pfizer news broke).

Vaccine news is less about assuming the pandemic is now over, and more about reducing uncertainty about the remaining timeline. Most large institutional players are concerned about the middle- to long-term outlook, not just the next weeks. As of now, consensus is that FDA emergency use authorization may come before year-end, and mass distribution for US and Europe during the first half of 2021.

Vaccine news is not so great for the companies that have benefited from the pandemic and led the stock market recovery until now, tech or not. Stocks like Zoom and Shopify have pulled back rapidly from their earlier highs, and even mega-caps like Amazon and Facebook have been on the retreat. Long term bond yields have also been rising as investors rotate into higher-risk assets that will benefit post-pandemic like travel and real estate.

However, the potential for renewed lockdowns complicates the short term picture. Many parts of Europe have already put restrictions back in place, albeit not as harsh as in the first round of lockdowns. Several US states are also following suit. Given these restrictions, the immense second wave in the Western world and the potential for cases to spike in the colder season, a ‘double-dip’ recession is possible before vaccines can get to enough people.

Trump and fiscal stimulus

The election was a massive uncertainty, exacerbated by the inaccuracy of pollsters reminiscent of 2016 — they projected a ‘blue wave’ with the Democrats taking both the White House and Congress, and institutions and fund managers had begun to price this outcome into the markets. However, as we know, things turned out to be much different.

For now, Trump does not seem likely to retake the White House, and his influence on the markets has been deescalated. Now, the main sticking point left with his administration is his delay tactics.

First, Biden being blocked from performing transition work, including coordinations with the coronavirus task force, will delay distribution of the vaccine. It is possible that the necessary work can only begin in mid-Jan 2021, which would significantly hamper the recovery timeline.

Second, the staunch commitment of Republicans in Congress to Trump’s voter fraud agenda means that no progress is being made on fiscal stimulus negotiations, despite cases and hospitalization rates hitting all-time highs. Like the markets, I am not interested in the politics. Regardless of who wins these petty brawls, further fiscal stimulus is a major catalyst anxiously awaited by both market participants and the citizens worst hit financially.

However, collaboration with Trump and with Democrats has become almost mutually exclusive in the current climate. Fiscal stimulus is, as Fed chair Powell has nagged for months, essential to continued recovery. Powell has already exhausted all the safest tricks available to the Fed to get us here — measures like explicit yield curve control, junk bond/stock purchases and negative rates are far too risky for now. The ball is in Congress’ court now, and further delays to fiscal support means many more businesses will collapse between now and the moment everyone receives their second vaccine shot. More on this in the final section.

4 Money Management Tips for First-Time Entrepreneurs | DataDrivenInvestor

Thirdly, Trump’s attempt to appoint Judy Shelton to the Fed could potentially complicate monetary policy moving forward, regardless of who’s in the White House. She has unconventional (to put it lightly) views on economics, and her fitness for the job has been questioned by many including Republican senators. Her confirmation advancement has just failed, but it’s not game over yet. If confirmed, she would at the very least obstruct the Fed’s current policy direction. The factual right and wrong of economics aside, the Fed has been instrumental in preserving the economy’s fragile stability and nudging it into recovery — disruptions could prove truly dangerous.

Trump Is Sick: What You Must Know for Financial Markets

In the base case, Trump’s delay tactics are simply that — delay tactics with little lasting consequence. However, there are still non-zero tail risks: he might somehow retake office, and if not, he might inspire or even incite civil unrest. Once again, financiers don’t care about arguing with him over voter fraud. Whether or not he returns to office is purely an issue of uncertainty, economics and policy direction.

Control of Congress and policy

The popular rhetoric often accuses Wall Street of being greedy and colluding with politicians. Believe what you will of people’s motivations, but the market’s behavior is generally pretty straightforward. All it cares about is certainty and fair value — we see that in how it reacts to Congress and policy matters.

Uncertainty is bad. That is why it…

1. Was calm before the election: volatility was expected but pollsters convinced many that a ‘blue wave’ was the base case
2. Went ballistic on the first days of the election: certainty vanished as everyone quickly realized that the polls were horribly wrong again
3. Stabilized the following week: certainty returned as the current base case (Biden and Republican Congress) emerged

Fair value is good. Biden has a tax hike agenda, but having a Republican-majority Congress greatly reduces chances of tax reform. This means there is a reduced chance that valuations of assets drop due to tax, and therefore stocks rise. Wall Street isn’t celebrating the failure of reform, it’s just adjusting to the best estimate of certainty and fair value. Similarly, your local grocer raised prices to match what their suppliers are charging, not to spite you.

That said, a lot still rests on the upcoming run-off elections. While it seems likely that Republicans will keep the majority, an upset is possible and would radically change the policy and valuation outlook.

Biden’s tax policy is front and center — if Democrats take Congress and his reforms are passed without resistance, companies will experience a significant cut in income which first directly reduces valuations, and next may create cost-cutting pressures that could bleed into the rest of the economy.

Another closely-watched area of policy is healthcare. This has been a hot topic for every US politician (and economist) in recent memory. On the ACA, insurance, drug prices and government spending, Biden’s plans will influence the profitability of companies in various segments of the healthcare sector if passed into legislation.

Finally, Biden’s clean energy agenda may affect all parts of the energy sector. Oil producers and oil-producing states have significant political power, but the clamor for increased renewables investment has also grown. It remains to be seen whether the shale industry will get the short end of the stick, and if clean energy companies like Tesla will receive more incentives.

Tax loss harvesting

Finally, from a more technical perspective, institutions will be looking to harvest tax losses before the calendar year is up. If you’re unfamiliar, tax loss harvesting is a technique to reduce tax payable on capital gains by selling off assets on which you’ve made a loss — those realized losses will offset gains on other assets.

Then, you can buy a ‘sufficiently different’ asset to replace the one you sold. For example, after the March crash, you could have sold a position in SPY to realize the losses, and replace it with a position in an all-world index to maintain that exposure in your portfolio.

Some institutions may already have done some tax loss harvesting at the end of Q3, but chances are we’ll probably see more of it before the year ends. This may create technical selling pressure on some stocks that have generated large losses this year and possibly contribute to a little extra volatility before the holidays.

Bill Ackman and what it all means for you

Bill Ackman, manager of Pershing Square Capital, was touted as the second ‘Big Short’ earlier this year when he bought $27 million worth of credit default swaps before Covid hit the US earlier this year, a trade that generated a $2.6 billion profit.

Credit default swaps are simply insurance contracts on companies defaulting on their debt, issued by a third party insurance company. When the economy is chugging along splendidly, the probability of mass default is low, and CDS contracts are generally cheap. When everything is crumbling, mass defaults become likely and CDS prices spike.

He just put on the exact same trade, albeit at 30% the size of the previous.

“We’re in a treacherous time generally and what’s fascinating is the same bet we put on eight months ago is available on the same terms as if there had never been a fire and on the probability that the world is going to be fine.” — Bill Ackman, FT

It is indeed hard to comprehend why, on a purely fundamental level, credit markets have completely recovered. The stock market is a different story — there are pandemic winners and low interest rates increase valuations — but debt is a senior claim with greater downside than upside, so default risk should be the number 1 consideration.

The Biggest Threat to the Stock Market: Economic Recovery

With fiscal support in the sorry state it is, the Fed running out of ammo, and second lockdowns looming or already under way, it makes no sense for default risk to be as low as pre-Covid. Yes, vaccines are on the way, but for all the delay tactics being employed and the time gap that remains between now and the earliest possible widespread distribution, many more businesses are going to fall through the cracks.

What does it all mean?

First it is important to note that Ackman’s CDS position is a hedge against long equities, and not a ‘bet’. That’s to say he’s not 100% convicted that credit markets will crash, he simply acknowledges the significant probability thereof.

Moving forward, even though attention is finally turning away from the election, a lot more uncertainty and potential pitfalls are on the horizon. There’s an increasing probability of stock and bond markets remaining in their current ranges with more volatility, or even further corrections in scenarios such as vaccine and fiscal stimulus delays and Senate upsets.

For mid- to long-term investors, positive vaccine news makes more of a difference to the 2021 outlook and beyond, so a little volatility in coming months shouldn’t be reason to stay out of the market. In fact, dips may be good opportunities to buy. However, if you’re investing more, it’ll probably be wise to use dollar-cost averaging, and stay diversified to preserve your heart health.

The Essential DIY Guide to Diversifying Your Investments

For short-term investors/traders, given the growing binary narrative of pandemic (the Dow crashes and Big Tech strengthens) vs vaccine (cyclical rotation), expect more volatility and potentially increased market correlation. It may be wise to drop market exposure and focus on picking individual stocks that become mispriced due to market fluctuations.

Finally, if you haven’t done any tax loss harvesting, it might be worth a shot.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.Gain Access to Expert View — Subscribe to DDI Intel

Problems That Will Sway Your Portfolio in Coming Months was originally published in DataDrivenInvestor on Medium, where people are continuing the conversation by highlighting and responding to this story.

Hey it’s Simon, thanks for reading. I trade and invest, write code, do graphic design and hike in weird places whenever time and finances allow. My past lives also include commanding tanks, dancing and looking for cheap pubs in Singapore. Currently finishing up a degree, but also spending a lot of time outside of university learning unmarketable skills.

What I write and why I write

I mainly write about personal finance, self-improvement and being an amateur at many things, and sometimes venture into programming, economics, hiking, and general banter. I take pride in my work but don’t claim to be a professional writer — I’m much more likely to make a living off Powerpoint (if you need a deck made, hit me up). Writing simply helps me learn better, and allows me to add value to readers who are interested in the same ideas or pursuits.

A note on spam and clickbait

If you don’t take well to spam, worry not — it’s unlikely that you’ll see me flood your Medium feed. While the money from these articles is a nice bonus, it’ll be a long time before it can buy me anything besides coffee. That’s why I’m not trying to churn out cookie-cutter content with clickbait titles ten times a week. I will write only when there’s something interesting to say, and I’ll strive to represent my work fairly.

A note on falsehoods

I often write about money, a content space that has always been the target of get-rich-quick scams. Unfortunately that muck has long spilled over from the realm of questionable banner ads into Medium as well. I am not a financial advisor, and I will not sell any online courses or e-books. Again, I write because it makes me a better student of finance and investing, and will not try to convince you that selling calls on the SPY every week to generate ‘passive income’ is anything but idiotic. True story. On Medium.

A note on politics

I don’t give a New York subway rat’s arse. If something I write looks remotely political, it’s either for the sake of discussing economics and finance, or to highlight a viewpoint I found interesting.

Here the articles I enjoyed writing the most, and think you’ll enjoy reading. If you don’t, please fax me your feedback on the first day of spring.

Investing, trading and personal finance

• 4 Things I Gained as a Trader That are Better Than the Money
• Investing basics series: Starter’s Guide, First Investments, Diversification

Self-improvement and learning

• Darwinism May be the Key to Overcoming Stagnation

Finance and economics

• The Biggest Threat to the Stock Market: Economic Recovery

Attempts at programming

• From zero to full-stack web development in 37 days

Survival hiking

• On the Trail of Kings

Banter that I laugh at

• The Investing Wisdom of Among Us

I’m usually on Mind Cafe, The Ascent, The Post-Grad Survival Guide and Towards Data Science. If you’d like to, follow me for more content outside those topics as well.

We all stagnate sometimes. We lose our drive and fall into autopilot; our minds drift in limbo as we trudge through our days, and we become unmotivated, bored, disillusioned. We’re always exhausted, nothing excites us, and even if our jobs keep us busy, time feels like it has stopped.

If you’re feeling stagnant now, you’re not alone — we’re all experiencing it to some degree thanks to how the pandemic has changed our lives. As a result, many of us are turning to the usual self-help methods and hacks.

My military days used to be my self-help holy grail, so I was also guilty of believing that the answer to everything is intense workouts and sheer willpower. Another popular piece of advice is to change your ‘locus of control’ — this means to appreciate and exercise control over the small things in your daily life, in order to feel less anxious and helpless.

However, while these methods are tried and true for improving our productivity and emotional state, they can’t help us overcome stagnation. Stagnation is ultimately a form of boredom. We can’t will our minds into being stimulated, and if our lives have already been reduced to Zoom meetings and nervous grocery runs, narrowing our loci of control even more won’t get us excited to leap out of bed every morning.

Nearly 200 years ago, Darwin discovered how species overcome their environments, and today his ideas can tell us how to help our minds overcome stagnation.

The solution is not to dig our heels in, but to adapt and evolve; instead of willpower, what we need is disorder. Adaptations are created by randomness and natural selection. By understanding how your mind changes, treating boredom as a force of selection and increasing randomness in your life, your mind can adapt and thrive again. Here’s how.

Our Minds Are Not Immutable

The first lesson you can take from Darwin is that there is no ‘new normal’. To believe in ‘pre-Covid’ and ‘post-Covid’ life is to believe that your mental life today is detached from your mental life before, and it cannot change unless Covid changes. On the contrary, your mind is on a continuum, and can ‘evolve’ into any form you desire.

In On the Origin of Species, Darwin asserted that species are not immutable. In other words, evolutionary changes to a species are unlimited, so any species can become another given enough time. Many ‘distinct’ species, in fact, may once have been the same.

“By freeing biology from its commitment to the immutability of species, that is to say, from its preoccupation with fixed forms, Darwin made it possible for the biological sciences to […] become truly experimental.” — Harry K. Girvetz

Darwin caused outrage because his contemporaries believed that species were created distinct, including humans, and boundaries between species will never be breached. Even though those ideas have long been dispelled from biology, today we continue to be preoccupied with the lie that our mental state is fixed or dictated by outside forces like Covid.

Neuroplasticity shows definitively that our brains do not stop adapting and making new connections throughout our lives. In other words, mental evolution isn’t just unrestrained like biological evolution, it also happens all the time instead of across generations. Our inner lives are unbridled — the end of this pandemic, or any other exogenous problems, is not the prerequisite to escaping stagnation.

Boredom Is a Force of Natural Selection

Boredom is a sense of discomfort from a lack of mental stimulation, and Robert Plutchik defines it on his Wheel of Emotions as a milder form of disgust. In other words, our brains believe that stagnation is as poisonous as rotten eggs and cockroaches.

“Nothing speeds brain atrophy more than being immobilized in the same environment.” — Norman Doidge

Perhaps because humanity’s survival has become so dependent on our intellect, we’ve evolved to fear brain rot. Boredom is dangerous — it has been associated with higher levels of anxiety and depression, which means that a lack of stimuli could spiral into something worse if left unchecked.

However, we can use ennui to our advantage. Think of boredom not as rotten eggs, but as a survival signal like hunger or thirst.

The second breakthrough Darwin made was discovering that evolution is a completely random process. Darwin’s contemporaries believed evolution to be purposeful, i.e. a species’ adaptations were either a direct result of environmental pressures, or a deliberate act of God. In contrast, Darwin correctly asserted that living things constantly undergo chance mutations, but over time only those mutations that assist in survival and reproduction persist. This is ‘natural selection’.

The desire to survive is what allows life to determine which adaptations are beneficial and retain them. Survival urges like hunger and thirst signal when and what animals need to keep themselves alive, and the process of satisfying those urges selects for evolutionary adaptations.

Similarly, boredom can show us not only when we need to feed our minds, but also what ‘food’ we need to consume. We don’t feel any less bored after a night of Netflix, but we feel refreshed and excited when we spend the same amount of time on a hobby.

Use Boredom to Select Your Mind Food

Start becoming more mindful about how certain activities, ideas and stimuli make you feel. Ask yourself, what specifically is it about this thing that bores or excites you?

Remember, entertainment and excitement are on different levels — watching sitcoms on Youtube is entertaining in the immediate term for me, but I’ll be bored again the second the video ends. On the other hand, there are Youtube videos about DIY and economics that I found so intellectually exciting that I would save them or take notes on them.

Boredom is our innate sense for what enhances our minds. By paying attention to how you reflexively respond to stimuli, you can locate your ‘mind food’ and start making changes to help you get more of it.

Randomness Gives Our Minds the Chance to Adapt

Boredom alone won’t do us any good — it is simply the mechanism that separates good and bad adaptations. The adaptations themselves occur completely randomly and without purpose, as Darwin had discovered. Therefore, to allow your mind to evolve, you need to expose yourself to new and random stimuli.

Cancer develops from cell mutations, but Peto’s Paradox observes that large animals like blue whales don’t get cancer despite having more cells and longer lifespans. It’s still a mystery, but one hypothesis suggests that these animals are so prone to cell mutations that cancerous tumors produce their own tumors (‘hypertumors’) that in turn kill the cancer.

Peto’s Paradox is the perfect illustration of how increased randomness, disorder and entropy can counterintuitively benefit us. In contrast, self-help hacks that call for extreme control and purposefulness are really like swimming against the current. That’s why it’s exhausting to force yourself to take cold showers or write in a gratitude journal everyday.

Instead of trying to fine-tune our minds, we can fight ‘tumors’ with ‘hypertumors’. However, randomness alone is destructive, and evolutionary biologist Theodosius Dobzhansky puts it as such in his Genetics of the Evolutionary Process:

“[…] mutation is a random process with respect to the adaptive needs of the species. Therefore, mutation alone, uncontrolled by natural selection, would result in the breakdown and eventual extinction of life, not in adaptive or progressive evolution.”

An entirely random life won’t be any more fulfilling than a rigid one. We need randomness to generate new stimuli and adaptations, and natural selection to retain the beneficial ones.

Combine Randomness With Selection

Introduce more randomness into your life, and let yourself experience new activities, ideas and stimuli without the need to be purposeful. This helps break the stagnant connections in our brains and make it conducive for new, unexpected connections to form.

Then, pay attention to how you respond to those stimuli. How much do they bore or excite you? What specifically about them piques or kills your interest? Once you’ve understood that, avoid what bores you, and seek out more of what excites you. This is natural selection at work.

Crucially, don’t stop repeating the process and introducing more randomness to maximize your chances of finding things that excite you. Also, this process should be fun and freeform, not deliberate and orchestrated — if you’re constantly planning what new things you need to try and doing cost-benefit calculations, you’ll quickly lose steam. Let randomness work for you.

Over time, finding your ‘mind food’ and seeking out more of it will help you discover new passions and pursuits that will nudge your mind out of stagnation and back into a flow state.

3 Ways to Start Introducing Randomness In Your Life

To kickstart the process, we simply need to add more chaos to our daily lives. This shouldn’t be the kind of ‘orderly mess’ you would use to describe your email inbox — to give your mind the nourishment it needs, you have to explore beyond the ordinary.

That said, don’t quote me if you decide to quit your job and make a living heckling toddlers in the street. Instead, start by making small, undirected variations in your daily inputs, outputs and routines.

Inputs: Change What You Consume

Make random changes to your information diet — listen to a new podcast, watch a new Youtube video, read a different news source, research a new subject, etc. The more unlike your usual diet, the better. However, these changes should be as convenient as possible. Instead of changing how you get information, randomize what you choose to consume and avoid the usual feed you get from recommendation algorithms.

I spend an inordinate amount of time on Youtube. Some weeks ago I came across a video about bonsai, watched it for no reason, and now I tend to a sizeable collection of plants (which aren’t even bonsai). That random stimulus led me to gradually discover an interest in cultivating outdoor plants and building self-watering systems, pursuits which have given me a lot of fulfilment.

Outputs: Produce Something Different

Create unusual things for their own sake, or just for fun. If your regular work has little scope for creativity, then do it anywhere else you can. You could write, paint, build, or code, but don’t have to be limited to these standard creative outlets at all. Take pictures. Rearrange the furniture. Make coffee the fancy way. Create a stand-up routine.

I’ve been leveraging Medium and programming to experiment with what I produce, and this article is a great example. My usual writing is focused on investing and finance, but I’ve taken the risk of deviating from my ‘brand’, because why not? If I hadn’t embraced the idea and decided to write this, I’d have never voluntarily studied Darwinism, but I’m glad I did.

Routines: Switch Up Your Habits

Take any aspect of your daily routine, especially the ones that you’ve adopted during Covid, and throw it out of the window. Take a different route on your socially-distanced morning walk. Get up at 5am for no reason, not because it’s a ‘productivity hack’. Sing aloud on your way to work (i.e. bed to kitchen to desk). Start doing a fake commute.

Last Thursday, I decided on a whim that instead of the usual afternoon coffee, I’ll hide a can of beer in my tumbler. Now, I can’t tell you how that changed my life, but that’s the point. It doesn’t need to have a purpose. But I can say I had a pretty good Thursday, and ruled out the possibility of a coffee-flavored beer business.

The Takeaway

We won’t be able to avoid periods of stagnation. Common self-help advice tells us to motivate, plan, and just will ourselves out of it, but willpower is too limited a resource. We all have enough to deal with without trying to impose even more order and structure on ourselves.

Instead, start applying the Darwinistic method to overcome stagnation:

1. Recognize that your mind is not immutable; you don’t need the environment to change before your mind does
2. Be mindful of boredom — understand which of the usual activities, ideas and stimuli in your life are not ‘mind food’
3. Introduce more undirected randomness in your life through your inputs, outputs and routines to experience new stimuli
4. Select for the new stimuli that excite you, and seek out more like it to gradually find new passions and intellectual pursuits

We don’t need more ‘purpose’ and ‘strategy’ — Darwin taught us that nature’s creations are the product of relinquishing, not exercising, control. Like the desire to survive, boredom is proof that we have an innate desire for mental fulfilment. By embracing randomness, we can cast a wide net for the things that can lift our minds into a healthier, more active state again.

Mind Cafe’s Reset Your Mind: A Free 10-Day Email Course

We’re offering a free course to all of our new subscribers as a thank you for your continued support. When you sign up using this link, we’ll send you tips on how to boost mental clarity and focus every two days.

Darwinism May be the Key to Overcoming Stagnation was originally published in Mind Cafe on Medium, where people are continuing the conversation by highlighting and responding to this story.

Diversification has been an open secret in finance ever since Nobel prizewinner Harry Markowitz formalized it in 1952. Today, it remains one of the best things you can do for your long-term investment portfolio.

It’s the simple idea that a portfolio can become more efficient — minimizing volatility for a certain level of expected return — by spreading capital and risk across multiple assets.

Say you invest $100 in a stock because you think it could return $50, and you’re willing to risk losing $20. If you invest in a diversified portfolio of similarly-risky stocks, you can still expect it to return $50, but its overall volatility may drop to 15%, which allows you to invest even more capital.

In short, a diversified portfolio gives you more expected return for the same level of risk. Markowitz goes as far as to say that diversification is ‘the only free lunch in finance,’ and he’s spot on.

However, the practical details of diversification might not be as clear to us novice investors. Where do I start diversifying? When do I know I’ve diversified enough?

This guide is designed to cover the essentials: just enough to help us retail investors to diversify effectively, and no more. We’ll discuss diversification in 5 simple steps, and even though this guide is based on stocks, the concepts also apply to other asset classes. If you’re entirely new to investing, you may want to go over the basics here first.

Before we jump in, here are some crucial points to address.

Key terms to know

Expected return: The probability-weighted average gain you can expect from an asset or portfolio. The expected return of large US stocks in the next 10 years is estimated to be 7.1%, i.e., on average, 7.1% profit per year.

Volatility/Standard deviation: Both terms are used interchangeably to mean level of risk and fluctuation. In the last few years, volatility has been at around 15%, i.e., there’s a high chance that the stock market fluctuates between +15% and -15% a year.

Systematic risk: The part of an asset’s risk that can be ascribed to the entire market. This risk can’t be diversified away.

Idiosyncratic risk: The part of an asset’s risk that is unique to itself — e.g., a company’s own competitiveness, leadership, etc. This is the portion of risk that can be minimized through diversification.

Do I even need diversification?

The default answer is yes. The only circumstance I can think of where it may make sense not to diversify is if you’re only going for moonshots.

In other words, you’re not interested in orthodox and proven investing methods, and you want to gamble on speculative assets that you think could make you 1000x your money. Think obscure cryptocurrencies, super-leveraged option bets on small companies, etc.

I won’t comment on whether this is right or wrong. All I’ll say is, gambling is not investing, and this isn’t the way most people want to deploy their capital. If you’re one of the few, you may not need to diversify because the asset is likely too unique, and there aren’t others with similar risk-reward characteristics. In that case, spreading out your capital may reduce the crazy amounts of money you’re expecting to make.

On the other hand, if you, like most of us, are interested in being a consistent and long-term investor, diversification is always better.

What diversification can and cannot do

As discussed before, diversification decreases the volatility of a portfolio for a certain level of expected return. That allows you to risk more and subsequently increase your return.

Diversification cannot make your portfolio bulletproof. Reduced volatility means that idiosyncratic risk is minimized, so one company’s woes will not shake up your entire portfolio. However, it cannot remove systematic risk — if the entire market crashes, you can’t expect to be unscathed.

Diversification cannot guarantee that you capture all profits. Diversification averages out the gains made across your portfolio, which means that you won’t see a big windfall if one of your stocks doubles. However, that missed profit is due to idiosyncratic risk, and in the long run minimizing idiosyncratic risk is always better for your portfolio overall.

There are shortcuts

ETFs make for great shortcuts to diversification — each ETF contains multiple (maybe even hundreds) of stocks, and using ETFs means you won’t need to do as much active stock-picking.

However, you have to know the potential weaknesses of the ETFs that you use. At each of the 5 steps, I’ll include a section on how you can use ETFs to achieve similar diversification effects and what to watch out for if you do.

Step 1: Diversify across companies

We’ll start from the bottom up since that’s how most of us invest — we find a few companies we like, start buying their individual shares, then throw in more positions over time to form a portfolio.

The first thing to do is find a few stocks — a good rule of thumb is to start with 5 companies. For example: Apple, Facebook, Disney, Starbucks, Tesla. These are quite different businesses, which is great because they’re already somewhat diversified. The more unrelated they are, the better.

Next, expand from this initial group to similar companies. If you like Facebook, you should diversify by buying other tech and social media stocks, e.g., Google and Twitter. That way, your portfolio benefits from social media and digital advertising growth and gets some insulation from Facebook’s idiosyncratic issues like antitrust lawsuits.

Be sure not to fall into the trap of diversifying just for the sake of it — every asset should be included for its own merit. At this point, you may have about 10–15 stocks in your basket.

Step 1a: Using ETFs

You can skip this step entirely if you start with a market index ETF. I think everyone should start with one.

However, you need to keep in mind that with an index ETF, you get exposure to everything, including stocks you don’t want anywhere within 6ft of your portfolio. Also, you don’t actually need that many stocks to diversify.

If you just want to remain an index investor and not pick stocks, you can go on to the next steps. Otherwise, start with the index, but once you’ve researched and found individual stocks you like, transition into the fully-DIY approach.

ETF picks: Dow Jones (DIA), S&P 500 (SPY), Nasdaq 100 (QQQ)

Step 2: Diversify across market caps

As you search for similar companies to your initial picks, make sure to look out for companies with various market caps. Traditionally, market caps are categorized into large, mid and small, but over the last few years, the biggest companies have come to be known as mega-caps.

Large caps and small/mid caps are influenced differently by factors like regulation, competition, growth, etc. As a result, they perform differently, so they’ll add diversified value to a portfolio.

If your basket now has only mega-cap stocks, further diversify with a few small and mid cap picks. For most, a 70–30 ratio of large to small/mid works for most people, but there’s no hard-and-fast rule; adjust according to how much risk you want. At this point, you may have 15–20 stocks in your basket.

Step 2a: Using ETFs

This is where you can start differentiating yourself from index investors. Most indices overweight mega-caps — the DIA and QQQ only include massive companies, and the SPY is market cap-weighted, which favors mega-caps. As a result, most index investors are poorly diversified across market caps.

If you only have mega-caps in your portfolio so far, either from indices or your personal stock picks, you can quickly add small/mid cap exposure using ETFs designed especially for small and mid cap stocks. Again, it’s always better to pick stocks yourself, but ETFs are a great interim solution.

ETF picks: Russell 2000 (IWM), S&P mid cap (IJH), S&P small cap (IJR)

Step 3: Diversify across sectors

The benefits of diversifying across sectors are very clear — if you held a portfolio of just oil companies, you would’ve suffered in the last couple of years while the rest of the market sped ahead.

However, today’s new investors tend to conveniently overlook this same problem when it comes to tech stocks, out of FOMO for explosive stock gains. Granted, popular tech companies technically serve different sectors, but their stocks are highly correlated. Plus, don’t forget what happens when one stock/sector gets hyped up too much.

Aim to cover at least 4 sectors in your portfolio. For example, if you started with too much tech, add some financial, healthcare, consumer staples, or industrial stocks (see here for a list of sectors). Remember not to be swayed by past performance — the market goes through cycles, and a weak sector last year may become a strong sector the next.

At this point, you may have around 30 stocks in your basket. There has been a constant debate about how many stocks are best at this stage, but generally speaking, 30 should give you the majority of diversification benefits.

Step 3a: Using ETFs

Like for diversifying market cap, ETFs make diversifying sectors extremely easy. Use sector ETFs as stopgaps, to begin with, but replace them later with stock picks once you gain more experience and learn how to research investing fundamentals in different sectors.

ETF picks: The Select Sector SPDR series (XLE, XLF, XLV, etc.)

Step 4: Diversify across countries

The US market has its own idiosyncratic risks compared to other countries, though the interconnectedness of global markets means US problems will also affect other countries to some degree. In the wake of a disastrous 2020 for the US, diversifying investments across geographies is getting renewed attention.

The US stock market makes up about 55% of global stocks by market cap. Foreign markets are divided into developed (UK, Europe, Japan, etc.) and emerging markets (Brazil, Russia, India, China, etc.). Developed markets experience less volatility but also have lower expected returns than emerging markets.

For most people, allocating anywhere between 30%-50% of a portfolio to foreign assets makes sense. The makeup of developed and emerging markets in that slice will depend on your own preferences.

Researching and picking foreign stocks is harder than for US stocks due to different accounting and reporting standards. As such, sticking with ETFs will be the most efficient way to achieve global diversification.

Step 4a: Using ETFs

The easiest way to go is to hold something like the Vanguard All-World (excluding US) ETF (VEU). However, these options overweight large caps in developed markets. Also, be aware of sector biases: like how the US market is skewed towards tech, the UK FTSE index is skewed to financials, and the German DAX index is skewed to financials and materials.

To make up for these biases, you can include country-specific ETFs, emerging market ETFs, country and sector ETFs, international small cap ETFs; the list goes on.

ETF picks: Vanguard All-World Ex-US (VEU), iShares Core MSCI (IEFA — developed markets only), Vanguard All-World Ex-US Small Cap (VSS), iShares Emerging Markets (IEMG), iShares China (MCHI), iShares India (INDA)

Step 5: Diversify across asset classes

Stocks are not the only investable assets; other asset classes include corporate and government bonds (both US and international), commodities (gold, silver, oil, etc.), currencies and alternatives (preferred stocks, real estate, private equity, etc.). For more on investable assets, go here.

Stocks are inherently high-risk, so many investors include bonds in portfolios to lower risk. However, bonds and other asset classes also provide diversification benefits because they help minimize the risks that are idiosyncratic to stock markets.

At this highest level of diversification, we’ll encounter much more advanced problems.

• Bonds have much lower volatility and expected return than stocks, to achieve diversification benefits without sacrificing return, investors have to use leverage to match returns between asset classes
• Commodities like gold and alternatives are valued in vastly different ways compared to stocks; gold, in particular, has next to no intrinsic value (which opens up a whole different topic of debate)
• Commodities like oil and foreign currencies are heavily influenced by macroeconomic and geopolitical factors, which are much more complex and unpredictable compared to individual stocks

Most of us are better off avoiding leverage like the plague. I’d recommend including bonds mainly for the benefit of lowering risk and bringing in other asset classes only when you know exactly what you’re doing.

Step 5a: Using ETFs

Yes, there are ETFs for everything under the sun. It’s the golden age of retail investing.

Don’t forget to examine the composition of each ETF or index before using — many will face the same distribution problems that stock ETFs do. For example, the iShares Core US Aggregate (AGG) is heavily skewed to Treasury bonds. Most investment grade bond ETFs are dominated by bonds with BBB credit quality (the lowest tier of investment grade).

Also, be careful of liquidity issues — some of the alternative assets ETFs don’t have much volume or assets under management. Always opt for picks with higher AUM and trading volume, if possible.

ETF picks: iShares Core US Aggregate Bond (AGG), iShares Investment Grade (LQD), Vanguard Total International Bond (BNDX), SPDR Gold Trust (GLD), United States Oil Fund (USO), the Invesco CurrencyShares series (FXE, FXY, etc.), Vanguard Real Estate (VNQ), Invesco Private Equity (PSP)

Summary: What a diversified portfolio may look like

We’ve talked about the 5 levels of diversification, which you can follow step-by-step to build a diversified portfolio from the ground up. Here’s what that process may look like in summary.

1. Companies: Start with 5 stocks, add similar picks to reach 10 stocks
2. Market caps: Add small/mid cap picks to reach 20 stocks
3. Sectors: Add picks from other sectors to reach 30 stocks
4. Countries: Choose 3–4 international ex-US and emerging market ETFs
5. Asset classes: Choose 3–4 ETFs across corporate/government bonds and commodities
6. Final allocation: 50% US stocks (divided equally across the 30 picks), 30% international stocks, 20% bonds and others

For pure index investing, you could choose 4–5 US stock ETFs in place of the 30 stock picks and allocate accordingly.

Remember, this is a model, not a standard — your portfolio should be customized to your needs and risk tolerance. Like I said, this guide aims to be practical and to give you just the essentials. If you divide your investments up in a similar way, you should be able to capture most of the benefits of diversification.

Resources

If you want to learn more about ETFs, you can find it here. For more on investing/trading basics, you can read this. If you’re in the mood for more light-hearted investing tips, you can go here.

ETFDB.com is a great place to find ETFs, SeekingAlpha is a good resource to learn how to research stocks, and Yahoo Finance remains a surprisingly good data source.

All information presented is for educational purposes only and not to be construed as legal, tax, investment or financial advice.

The Essential DIY Guide to Diversifying Your Investments was originally published in The Post-Grad Survival Guide on Medium, where people are continuing the conversation by highlighting and responding to this story.

Stepping into a tailor’s shop for the first time was a one-of-a-kind experience.

It was tiny, just about the size of a neighborhood grocer, but the floor-to-ceiling shelves were brimming with rolls of fabric. A pleasant smell of fresh laundry and the slightly hunched old tailor greeted me as I walked in.

I was used to glitzy, fluorescent-lighted fast fashion megastores that seemed to get more massive and more fickle in their tastes every year . This little shop tucked away in the corner of a forgotten mall was a relic in comparison. Yet, in this shop, I felt more confident, more grown-up, richer. For an 18-year-old kid, it was an inexplicable but magical feeling.

The $500 custom suit I bought from that shop was — and still is, years later — the most expensive piece of clothing I own by a long shot. It was also the quickest purchase decision I’ve ever made. I’ve spent far longer mulling over $5 T-shirts that I still ended up regretting.

$500 is a lot of money, and forking it over was painful, but 18-year-old me knew it was worth it. Back then, I couldn’t put my finger on exactly why, but now I understand it: it’s a simple question of price and value.

The golden rule: Price < Value

Everything you buy, everything you invest in, everything tangible and intangible you acquire — the golden rule is always to choose what provides more value than its price.

Let’s see how this checks out using my suit.

Examining only the financial part of this transaction, the lifetime value I gain from the suit is much more than the $500 price-tag. My suit is:

1. An income generation tool, because it increases the chances of someone employing me or doing business with me in the years, I’ll be wearing it.
2. A store of value, because it’s well-made and fits me perfectly, so I can wear it for years without needing (and more importantly, wanting) to replace it.

Part 1: Potential income

• Let’s assume that wearing a suit makes me 1% more likely to get employed (or stay employed) than not wearing a suit.
• Let’s say my average salary over the suit’s life is $100k/year.
• Every year, the suit creates 1% * $100k = $1000 of value for me. That’s double its price.

Part 2: Depreciation

• Let’s assume I wear it 3 times a week, and it lasts 10 years (not exaggerating — I’ve had it for 6 years, and it’s good as new).
• In a year, I’d have worn it 216 times. Over its life, 2160 times.
• It costs $0.23 per use. In other words, it depreciates 0.046% per use or 10% per year.

My suit creates $1000 of value while depreciating just $50 every year. Over its lifetime, it’ll generate $9500 of net value. This doesn’t even include the emotional value it carries for me — and remember, as long as the net value is more than zero, an expenditure is ‘worth it.’

Transactions govern, build, and shape our lives. I don’t mean that in an ‘existence is shallow, woe is me’ way; I mean that everything we come to own and/or enjoy is the result of a give-and-take relationship.

If everything we buy provides more value than its price, then we’ll become wealthier with every purchase in the greater scheme of things.

If our choices always have a net positive value, then our lives will keep getting richer and fuller.

For every transaction that we make, step back, and consider: does this cost less than its value? Are there alternatives with higher net value?

All that glitters is not gold

I don’t know about you, but I don’t buy suits daily. How does the golden rule hold up in daily life? Does it dictate that I stop spending money on anything that won’t help me get or keep a job?

Of course not. Personal finance isn’t about wearing suits; it’s about living our best lives on an efficient budget. What we call ‘value’ in the golden rule encompasses dollar value, utility, and intangible value.

Dollar value is simple: the amount of money you can generate from something. This is the main measure of value for investing decisions. In fact, the crux of investing is exactly that — buying the undervalued and selling the overvalued. However, this also applies broadly to things that directly help us make or retain money, like suits, laptops, and college tuition.

Utility, a term I’m borrowing from microeconomics, refers to a qualitative satisfaction we get from something. This is an indispensable measure of value for entertainment expenses, like a Netflix subscription, and is really useful for comparing similar items.

Intangible value is also qualitative, but it is much more long-term and personal than the utility. For example, a honeymoon provides next to no dollar value and maybe some short-term utility (e.g., satisfaction from getting a week off work), but the main benefit is intangible.

As a result, many things are worth spending money on despite not generating income for us, because they add value to our lives in myriad ways. However, conversely, money is not the only thing we give up on these purchases.

All that you pay is not money

When we buy, invest or commit to something, we’re making a transaction and giving up something in return. The four types of costs are money, time, energy, and opportunity.

You’re thinking, “I came here for personal finance, not some productivity spiel.” Yes, money is the first thing we consider, but I would be doing you a disservice if I gave you the golden rule without the disclaimers.

You see, the golden rule of price < value could lead you into what I call the ‘Netflix trap’ if you forget to consider non-money costs.

Netflix is a wonderful service. The low-low price of $8.99 a month gets you hundreds of original, high-quality shows, streamed anytime you want. This is immense utility value, especially if you get the same enjoyment from watching a show (that effectively costs you a few cents) and going to a theme park, which can cost you hundreds.

By that logic, you should buy every single streaming service out there. Hell, why not also watch everything on Youtube for free, that’s an even better bargain.

But you don’t. Well, you shouldn’t because Netflix comes with sky-high time and opportunity costs. Time and opportunity that you could’ve spent on something with a much higher net dollar or intangible value.

This is why if you don’t evaluate costs other than money, the ‘rational’ consumer would always want more Netflix, more Hulu, more Disney+…

I’ve separated opportunity cost from time and energy costs because they don’t always overlap. Opportunity cost is especially important when you’re comparing options and when your resources are minimal. For example, it’s important in investing because the money you invest in one asset cannot be reused.

How do we find price and value then?

If neither value nor price is limited to money, what is the point of the golden rule? How do we even apply something so complicated?

The price < value rule is less about quantifying every bit of price and value and more about pushing us to evaluate tradeoffs, understand our own needs, and keep those needs top-of-mind.

Often, the buyer’s remorse and credit card debt happen when we don’t know our needs well enough and let pretty things cloud our decision-making. Many bad investing decisions are also the result of not sticking to our guns and letting other people influence us.

With every transaction, the simple question of “is price < value?” often comes with these nuances:

Money, utility, and/or intangible value — what will I get out of this? Is its value what I really care about or need right now?

Money, time, energy, opportunity — all things considered, am I giving up too much? Is there an alternative with more net value?

Some examples

1. University: Most people see it as an income generator and an intangible life experience. But are these worth the money, time, and opportunity cost for you? Can alternatives like community college, online courses, or entrepreneurship provide more net value? Even Google has stopped caring so much about degrees.
2. Stock investing: Yes, it promises a lot of potential ‘passive’ income. However, anything more than index investing is difficult, and often it demands more monetary losses and time commitment than expected before a new investor gets good enough to make money from semi-passive investing. That said, it’s a challenging intellectual pursuit that rewards you in more ways than just money too.
3. Smartphones: This is one that ticks me off personally. It does much less than a laptop, makes us addicted to time-wasting media, cheeses us into believing we should upgrade every other year, and forces us to pay for 2.5 more cameras than we need. Mine sees a lot of use converting paper into PDFs, and for that even, an iPhone 4 camera would be more than enough.

Finally, the golden rule works for everything, but you don’t have to keep to it religiously when the stakes are low. Remember: the goal of personal finance is not to be rich, but to live well. It’ll be hard to live well when you’re stuck in a deli fretting over how much utility a $2 Hershey’s bar can supply.

Summary

• The golden rule: Price < Value
• Types of value: Dollar, Utility, Intangible
• Types of costs: Money, Time, Energy, Opportunity
• The goal: Evaluate tradeoffs and your personal needs

More on money management from Making of a Millionaire

• Mark Cuban’s Most Recent Money Advice is Ridiculously Simple And Super Important
• How to save Your First $100k and Why It’s So Hard
• When a $100,000 Salary Isn’t Enough

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

I Learned All I Needed to Know About Money from My Suit was originally published in Making of a Millionaire on Medium, where people are continuing the conversation by highlighting and responding to this story.

Congrats on buying a lovely new spaceship. Well, I say ‘new’ — it’s really only new to you, since you bought it off Craigslist. You can’t wait to get it off the ground because you’re trying to start your own space Uber business, but unfortunately it’s still pretty janky and smells weird.

You hire a crew to clean up the ship and prepare it for its first journey, but little do you know, a few imposters have snuck in to cause mayhem. They like nothing better than to massacre the crew you’ve paid for and watch the ship you spent your precious savings on go up in flames.

They want to watch the world burn.

Welcome to Investing 101 x Among Us, the crossover nobody asked for, where I’ll be pointing out the basic investing concepts and best practices this lovely game is so good at explaining.

Like your future space Uber business, it’s possible to one day live solely off passive income from your investment portfolio — that’s how the rich get richer. However, you need to start putting money into your ship now and consistently and smartly invest in your crew in order to build up wealth.

If you’re a great Among Us crewmate, chances are you’ve already learned some investing basics without even realizing it. If you’re a 2000 IQ imposter, maybe you could start a hedge fund. Don’t believe me? Read on.

1. The crew doesn’t always win
2. Invest and keep quality crew
3. Eject the bad guys quickly
4. Split up, do your tasks
5. Reactors will melt down

The crew doesn’t always win, and investing is not foolproof

The first thing you learn about Among Us is: you could lose the game, even if crewmates outnumber imposters 9 to 1.

The first thing everyone should learn but always forget about investing is: you could lose all your money.

Stocks, ETFs, bonds, Treasuries — no matter which crewmates you choose to include in your portfolio, and no matter how easy and low-risk you’ve configured the settings, you could lose.

There’s no free lunch in the world (except diversification, but more on that later). A job pays you for your time and your work, and an investment pays you for the risk you take on. Generally, the higher the risk you take on, the more you can expect to be paid — that’s why you can expect stocks to make more than bonds.

While ‘investing is dangerous’ seems like an odd point to make at the beginning of an Investing 101 guide, it’s absolutely crucial because you need to know how investing works fundamentally. If there was no winning and losing, there would be no Among Us. That’s the premise of a game. Similarly, if investments always pay off without risk, there’d be no investing in the first place.

Understanding that investing is about taking smart risks is half the battle, because it’ll save you from some of the most common investing pitfalls. One of these mistakes is to rely on stock-picking ‘gurus’; if you’ve played one game of Among Us, you know you don’t believe everything you’re told.

Often, ‘gurus’ tell you to buy XYZ stock because it will 10x in value and will become the next Amazon. Some investment ‘advisors’ tell you to buy gold from them because it never loses value, or that if you let them manage your money you will retire early.

Don’t trust the imposters. Bad investments can be dressed up to look like sure bets, and even good investments have a small chance of losing value.

Invest in quality crew and keep them as long as you can

No crewmate can single-handedly win, and no crew can speed-run the game. Winning a game of Among Us always takes time, iteration and figuring out who’s a good crewmate. In fact, that’s the best part.

Investing is a long-term survival game — you should focus on collecting dependable, high-quality investments in your crew, instead of pumping all your capital into one tiny obscure stock that claims it’ll double or triple or 10x in value.

What makes a good crewmate is also very similar to what makes a good investment: they add the most value while causing the least turbulence.

The investing jargon to know here is ‘expected return’ and ‘variance’, where variance represents how turbulent or volatile the asset is by measuring how much it deviates from its mean. Getting the most bang for your buck, or potential return for your risk, is what underlies Harry Markowitz’s Modern Portfolio Theory.

Stocks, for example, are affected by many factors in the short term such as economic data, political bickering, Trump’s COVID-19 infection, and even which Friday of the month it is. However, in the long term, the company’s management effectiveness, market dominance, profitability, etc. are some of the best indicators of a high-quality stock.

Stock prices reflect the market’s overall expectations for the company’s returns and variance. The better the company is at running its business, the more likely it is to outdo expectations of its profit, or prove that its cash flows are more stable than believed. Either way, the stock becomes a better deal, and the price increases.

It’s hard to be sure which investments are good, since the bad ones keep masquerading as the good ones. However, over time, you’ll learn to watch metrics like a stock’s P/E ratio, return on equity, operating margin, etc. to make educated guesses at whether it’s worth owning, the same way you would pay attention to visual tasks, how long someone stands at a task, whether they help increase the progress bar, etc.

Once you’re pretty certain someone’s a quality crewmate, you have to stick to them like glue. Same goes for a quality investment. Remember: time in the market beats timing the market. That means staying invested in the same asset for years is usually more profitable than trying to buy and sell it at the right moments. No one can predict short-term peaks and valleys, but quality investments will trend higher over long periods of time as they can consistently beat market expectations.

If you’ve gone to the trouble of deducing who’s a crewmate but don’t stay with them, the next thing you know, they’ll be dead. If you don’t stay the course with a quality investment, you’ll likely miss out on its best moments of performance. Research, find and commit to the good ones, and you’ll be on your way to a winning portfolio.

Eject the bad guys before your portfolio goes up in smoke

Discuss often and throw out the imposters. Sounds too obvious to even point out in Among Us, but you’d be surprised how many investors hang on to bad investments, either because they don’t pay enough attention, or they refuse to admit that they’re wrong.

If you don’t regularly weed out the bad investments from your portfolio, they’ll eat away at your returns even if the rest of your investments are of the highest quality. But how is this done in investing?

Firstly, investors should have regular review-and-rebalance sessions. This could be few months or quarters depending on how risky your investments are, but these should be done regardless of how the portfolio is performing. Under the hood, things that could affect the stocks and bonds you’ve invested in are constantly changing — don’t wait for a crewmate to die before you start watching out for the signs.

At these sessions you need to examine each investment and consider if your investment thesis still holds, and if the market agrees with you. ‘Thesis’ is just a fancy way of saying ‘the reason(s) why this is a good investment’. You need a solid alibi to believe someone isn’t an imposter. If you invested in a certain stock because you think the company can gain much more market share than expected, then look at their revenue growth and how their competitors are doing — has anything changed? Are they less able or more able to do it now?

If the thesis still holds, has its price moved to reflect that? You might be convinced someone is a crewmate, but if the whole crew disagrees, you may need to rethink your assumptions. Market price rarely lies in the long run; if your investments performed opposite to your thesis for several months or quarters, there might be major problems you’ve overlooked.

Once you determine the changes you need to make to your portfolio, rebalancing it is just a matter of replacing bad investments with good ones. This rebalancing can be done gradually through dollar-cost averaging to minimize the volatility it causes.

Pro tip: if you’re a stock investor, listen to companies’ earnings calls. Every quarter they do a presentation of their results and get questioned by analysts — which is basically a discussion round. Sometimes you can sniff out the sus companies if you pay close attention to what they say.

We can never be 100% right on our investments — not even the greatest investor alive is. Being able to recognize our mistakes and throw out the imposters quickly makes the difference between a mediocre investor and a great investor.

In 2017, the FAANG (Facebook, Amazon, Apple, Netflix, Google) companies were already market leaders. Anyone could’ve guessed that these are high-quality stocks and invested in them. Yet, while the FAANG stocks each grew an average of 143% over the last 3 years, very few investors have made nearly as much in their portfolios. The imposters are constantly draining their returns.

Yet, many refuse to remove bad investments out of pride, which is also exacerbated by the negativity bias; we hate losses more than we like wins, and as a result are averse to giving up on bad investments because that will make the loss ‘real’.

Don’t obstinately hang on to bad investments, but also be careful not to fall into the other end of the spectrum: not believing in your own judgement. We’ve all been faced with the task of tie-breaking the final vote, when there’s 1 imposter left among 3 players and the other two are pointing fingers at each other. You’ll never get anywhere if you just listen to the two of them instead of thinking for yourself. In the same way, don’t invest purely based on hype.

Not only will following others’ recommendations make you reliant on them and be completely inept at investing in the long term, it may also lead you to make exactly the wrong choices. Retail investors are notoriously always late, and Robinhood getting excited about a stock (looking at you Tesla) might be a sign to get out instead of in. Bad companies are usually the most vocal and desperate to prove that they aren’t bad companies. In the worst case, so-called gurus might lure you into a pump-and-dump scheme.

Split up, do your tasks, diversify

Every sensible crewmate knows that when the game begins, you have to first split up and do your tasks. While it’s less safe for each crewmate, it’s the most efficient way to make progress and cover ground.

Moving together in a big group may deter imposters from picking off lone crewmates, but it’s slow, makes finding the imposters much harder, and allows imposters to stack-kill and sow discord.

When you build an investment portfolio, never put all your eggs in one basket. Each part of your portfolio has its own ‘tasks’ to do. Ideally, your portfolio should be diversified across geographies, asset classes and industries, so as to have a balance of risk levels and risk factors.

Diversification, according to Harry Markowitz, is the ‘only free lunch in finance’ — because a diversified portfolio minimizes idiosyncratic risk.

The risk your portfolio is exposed to is made up of idiosyncratic (specific to that investment) and systematic risk (risk that the entire industry/asset class is subjected to). If you hold multiple investments, their idiosyncratic risks average one another out, so a portfolio of 40 stocks would swing around far less compared to any one stock, and the portfolio won’t be severely affected by the whims of any one company.

If you sink all your savings into one stock, get ready for a ton of stack-kills, random fluctuations, losing chunks of money without even noticing, and just a lot of noise in general.

Diversifying risk factors (i.e. the source of risk) helps you get rid of the ‘extra’ idiosyncratic risk, so you get paid the same expected return for only taking on the systematic risk.

On the other hand, diversifying risk levels helps you fine-tune the amount of risk your portfolio carries, to match a level you feel comfortable with.

You can usually do both at once. Mixing stocks and bonds diversifies risk factors because stocks are more influenced by industry demand and bonds by interest rates, but it also diversifies risk levels because stocks are generally riskier than bonds.

Diversification may sound difficult, but there’s a great shortcut: ETFs and mutual funds. These are diversified baskets of investments that you can buy just like any single stock, and should definitely be a new investor’s first port-of-call. Starting with a diversified ETF is like running to do the nearest tasks first, instead of drifting mindlessly across the map.

Invest like a pro, not a casual.

Reactors will melt down, lights will go out, sh*t happens

Finally, no matter how experienced your crew is (and how many Twitch streams you’ve watched), you can’t stop sh*t from happening.

In the few days leading up to writing this, Trump was diagnosed with COVID-19, had to be put on oxygen, and somehow got discharged. A few minutes ago he just tweeted that fiscal relief deal will be made before the election… and my portfolio lost a healthy 1.5%.

But this is exactly the kind of systematic risk that we’re paid to take on as investors. Sometimes, really catastrophic and unlikely events, called black swan events, will come along and upend the markets. The dot-com bubble bursting in 2000, the financial crisis in 2008, the COVID-19 crash in Feb this year, etc.

The first time you played Among Us, you might’ve panicked when the sirens went off for the reactors or the oxygen. A few more play-throughs later, you find out that it’s just the imposters messing around, and these events become mere annoyances.

A good long term investor thinks of black swan events the same way. Now and then the market will crash, but in the bigger scheme of things these are just temporary disruptions. Often, black swan events have little irreversible effect on a truly diversified portfolio, which is why the US stock market as a whole has kept rising despite numerous stock market crashes. Those crashes did not fundamentally change the power and dominance of the US economy, so over time US companies continued to grow and receive investment.

Amateur players will fall into the tunnel vision trap, losing sight of everything around them and focusing solely on salvaging the problem. Worse still, some players panic and sell off their entire portfolios.

The smart player sees reactor meltdowns as opportunities to differentiate crewmates from imposters, and secure great investments at steep discounts. In fact, every crisis we encounter in everyday life is an opportunity, if we know how to make use of it.

Remember that volatility is a fact of life, and that your investments will always be at risk, but if you keep calm and use crises to your advantage, you’ll reap the biggest profits in the long run.

In summary, today’s Investing 101 takeaways are:

1. Remember you’re being paid for taking risks, and there’s no ‘sure’ thing
2. Always look for high-quality, dependable investments with strong theses
3. Review your portfolio often and get rid of bad investments quickly
4. Always stay diversified; starting with ETFs or funds is the most efficient
5. Volatility will pass; don’t panic-sell and look for good investments on sale

If you’ve made it this far, you might be wondering: what if I wanted to play as an imposter? Well, here’s a bonus takeaway: you can, and it’s called short selling. This allows you to bet on an asset falling in price instead of rising, and there are great plays you can pull off if you have a knack for deception and espionage. In fact, many hedge funds do this in a strategy called ‘fundamental long-short investing’, where they try to sniff out both high-quality companies and borderline frauds.

If you’re interested, feel free to read more about long-short investing online. However, short positions are much harder to execute and comes with some complications like interest payments on borrowed assets, so I wouldn’t recommend it for new investors.

Who knew being good at a trendy game can also make you good at investing? I hope you’ve enjoyed this weird crossover. If I’ve piqued your interest, you can read more about the basics of investing and trading here, and how you can get started with ETFs or mutual funds here.

Alternatively, if you want to see some of the 0 IQ trading plays I’ve made, you can do so here.

All the best on your investing journey. And do your tasks.

All information presented is for educational purposes only, and not to be construed as legal, tax, investment or financial advice.

Building wealth and building character are not mutually exclusive.

Hey there, I’m an options trader. I’ll be straight with you, I’m in it for the money.

But I’m not here to wave stacks of cash in your face or try to sell you a course about getting rich. I want to share with you the things I never expected to get out of my trading journey, which I believe are investments in myself that are more valuable than the money I’ve made.

Sure, the money’s good. It’s not yet enough to live off though, and it was so difficult to make that I’m not sure I’d have lasted this long, if not for the intangible returns.

Despite the bad rep that finance gets, I think it has a lot of interesting life lessons to offer if we just look carefully. Of course, like most other pursuits, we’ll never master the finer things if all we care about is the money.

5 Wall Street Secrets to Surviving Existential Crises

Regardless of whether you’re a trader, investor, or neither, I hope I can help you notice some of the wealth that lies beyond money in your profession. While we use our work to generate income, we must understand the way our work is influencing our character.

“We shape our tools and thereafter our tools shape us.”

— John M. Culkin

But let’s get into it. Here are the weird and wonderful things I’ve gained from being a trader that have made me a better person.

1. Guts

I’d have liked to think that I had guts before I started trading. I mean, to toot my own horn, I did go survival hiking alone in the Arctic Circle… twice.

That’s cute, but nothing quite like trading. Trading isn’t the rich boy’s video game that Robinhood meme culture might make it out to be — for me at least, every trade is terrifying. The moment I make a trade, I relinquish control of my money. If I’m wrong, it’s gone. I don’t think I’ll ever get used to grappling with that every single day.

Trading has given me a new perspective on and respect for risk that has reshaped my understanding of success and the good life.

I used to think that the best way to live was to avoid risks, regarding them as unnecessary and always harmful. I was taught that risk-taking was riding a motorcycle without a helmet on, or getting sloshed on a night out, but I now see what a spurious definition that was.

In fact, I had risk completely upside-down.

Success is not attained by avoiding risks, but by seeking out the ones that pay.

From studying for a degree and applying to a job, to writing this article and stepping outside in the morning for a socially-distanced walk, everything we choose to do carry risks. The people we think of as successful have simply made decisions in which the potential payoff was worth the risk.

I’m sure we’ve all been faced with difficult decisions, but we often balk at the thought of uncertainty. That’s normal — most of us are naturally risk-averse, and only become more so with age.

Yet, risk is good. Reward scales with risk. If we want to rise above everyone else then we must first embrace more risk than everyone else. I can never hope to make 10% on a trade if I’m only ever willing to put 0.1% on the line, and a portfolio of Treasury bonds will never come close to outperforming the stock market.

Must we, then, live everyday with wild abandon, running into busy roads and buying Tesla stock? Absolutely not — what we need are calculated and tolerable risks. We all have different levels of risk tolerance, and regardless of how high that is, it takes guts to invite uncertainty. Two traders, one willing to risk 1% and the other 50%, both feel the same fear and trepidation when they reach for the button to put that money on the line.

They say courage is doing something despite being scared. Merely living takes courage, but if we want to achieve something great, we have to start seeing risk as our equal instead of the monster under the bed. Uncertainty is not a hazy, bottomless infinity, but a simple set of scenarios, each with quantifiable probability. In some of them we win, but to even get a shot we have to grow a pair and carpe diem.

2. Control

Impatience, greed, rage, and a tiny bit of actual happiness — these were the ingredients chosen to create the perfect trader.

I had always enjoyed reading stoic ideas and wanted to be cool like Medium stoics, but little did I expect trading to be a better exercise in stoicism than Marcus Aurelius’ Meditations. The two stoic ideas that trading encapsulates are practicing misfortune and choosing how one responds.

Like farming, trading is a profession that’s vulnerable to exogenous and unpredictable climates. Despite being made of people, the market doesn’t listen to people, nor even reason sometimes. Benjamin Graham describes ‘Mr Market’ in his book, The Intelligent Investor, as a manic whose mood swings between depression and euphoria daily. This guy is my boss…

I won’t bang on about how emotionally challenging the job is, because everyone’s job has stress and uncertainty, so there’s nothing special about me or what I do. I would say though, that I had completely overestimated my self-control before becoming a trader. Sure, it’s a high-stakes environment where I’ll be under constant pressure, but I’ve been through some sh*t and I bet I can handle it.

I was wrong because I had never practiced this type of misfortune. I didn’t have enough experience with the sins that plague new traders, and fell victim to every trick in Mr. Market’s books — I doubled down on losses because I was greedy, I bought in too late because of FOMO, I went revenge trading because I was pissed off, etc.

But eventually, I learned to apply those stoic lessons I had only read about. I played small, learned how it felt to be wrong and swallow a $10 loss, and worked my way up from there. Trading helped me quantify misfortune and find out exactly how much I’m able to handle at any point in time. As a result, even though I’ve accumulated enough capital to further increase my risk exposure, I’m not doing so because I know I can’t yet deal with that higher level of losses.

We have no say in our fate, but we have full autonomy in choosing how we respond to the things that happen to us, whether they’re ‘good’ or ‘bad’. When we’re met with tragedy, we can choose to grieve and feel sorry for ourselves, or we could look for the silver lining and do something to address the problem. I remember reading about this concept in stoicism and thinking, yeah, makes sense, I’ll do that. But when I actually lost a third of my entire account, the silver lining was the last thing I gave a damn about.

I did eventually choose a more constructive and upbeat response than I’m going to give up trading forever, and in hindsight, that loss was one of the best lessons I’ve learned, but putting stoicism into practice was much more emotionally taxing than I’d expected. I needed the practice.

I’ve since recouped those losses, but that steep red line in my account history remains a testament to the self-control I was naive enough to think I had.

3. Humility

So far, I’ve led a privileged, sheltered life. I almost never have to worry about material needs, and I was lucky to be born with a good head that has gotten me a great education. That has, unfortunately, made me a pretty arrogant prick.

I’ve been aware of this glaring character flaw but have never been able to properly address it until I started trading. Here, I found more than enough failure to put me back in my place. The financial markets are one of the few places on earth where there aren’t any true masters — yes, there are experts at hedge funds and banks that know more about investing and trading than everyone else, but even they get it wrong sometimes.

Trading’s not even about trying to get everything right. It’s a game of probability where we know we’re undoubtedly going to be wrong sometimes (or even most of the time), but the point is to make enough money when we’re right to achieve a positive probability-weighted expectation over time. If that was a mouthful, losing is built into trading success.

This attitude of embracing losing (and all the actual money I lost, of course) helped me become humbler. I had never understood how liberating it is to be released from the pressure of being right all the time, and instead focus on softening the impact of losses. It’s a mindset I don’t think the world of standardized test scores and resume screeners can cultivate, but ultimately makes us all a little less self-obsessed.

I also had never considered how liberating it is to not have to listen to someone jabber on about trading.

As much as I find Robinhood memes and r/WallStreetBets distasteful and cringeworthy, they’ve helped to remind me that Jesus Christ dude, nobody cares. While I find money and the markets fascinating, they don’t make me anymore interesting of a person than a $5 fedora. Unsolicited tirades about my latest trade ideas would only come across as self-absorbed and condescending to others.

Trading is a lonely pursuit — we trade alone, in front of our own screens, managing our own accounts — so it’s natural to want to talk about it with like-minded people. We crave social proof as we would for anything else we’re passionate about. But spending enough time immersed in this environment has taught me not to be obnoxious and be humble enough to shut up, especially since I barely know enough about trading to be right more than half the time.

Money is such a small part of life. I need to talk less, listen more, and appreciate the value of things that aren’t bought and sold.

4. Moxie

There are a lot of former athletes amongst traders. I’ve always regretted not playing a sport competitively both for the fun and the character-building, but trading has given me a little taste of that same sporting spirit. It has made me a more competitive, confident, critical, and oddly chill person.

Especially in these particularly volatile times, uncertainty tends to inspire pessimism and wariness. Through the shared experience of WWII, western societies gravitated away from religion and towards existentialist philosophy, as faith in not just God, but also human institutions were eroded by the horrifying gore of war. By way of systematically exposing me to uncertainty, trading has fuelled my cynicism, but it has also helped me channel that into healthy and constructive responses.

The world of investing and trading is fraught with ‘psychics’ and gurus who claim they can give you sure-win stock picks if you buy a course or subscribe to a premium newsletter. Of course, some advisors are legitimate, but for the most part noise dominates signal. Having once bought into these hoaxes, realized my mistake and learned how to actually invest and trade, I’ve developed a much better BS-detector.

I’m no longer frustrated about these fraudsters either. Trading is such a black-and-white game — the proof is in the pudding; the account value never lies. My faith in humanity may be a little deprecated, but my faith in real skill prevailing over luck and gibberish has been restored. You can’t cheat your way into making consistently good trades.

If you ever see any of these BUY THIS STOCK AND GET RICH ads, remember: if they really knew what they were talking about, they’d be trading on it themselves. Don’t take the easy way out and trust the ‘hype’ — get good and trust yourself. Nowadays, when I see these scams, I get a boost of fighting spirit from knowing that long after they’ve vanished from the internet, I’ll still be trading strong.

What You Must Know Before Investing in Hyped-Up Stocks

Just like how there’s always the next game to play in sports, there’s always another day to trade. Losses no longer hang as low over the horizon as they used to — in fact, losses get me more hyped for the next trading day, so that I can show Mr Market who’s boss. I mean, he’s still my boss, but I know I can get my money back from him. There are 250 trading days in a year, more than 10 big stock exchanges in the world, and countless assets being traded every day. There’s always another chance.

I don’t know what your impression of trading is. Maybe you think of it as a kind of Hunger Games, where everyone’s out to mug everyone else until only the ‘big banks’ are left. As a lone retail trader I’ve come to see it as a marathon, where the competition sort of matters, but more importantly you’re racing against yourself, trying to beat your personal best, managing your own emotions and focusing on long-term survival.

Sure, it’s a profession built on money and money alone. But even in this seemingly chaotic, materialistic and cutthroat arena, there’s some great self-improvement to be had. If you’re a budding investor or trader, I hope you too will get more from it than just profit, and you can go here if you’d like an introduction to what it’s all about.

If you have zero intention of ever trading, I hope this slice of life has been refreshingly different from the popular narrative, and that you’ve gotten some actionable insights from it nonetheless.

4 Things I Gained as a Trader That Are Better Than the Money was originally published in Ascent Publication on Medium, where people are continuing the conversation by highlighting and responding to this story.

Trump is down with COVID-19. Politics aside, the President is faced with a potentially life-threatening disease a month before one of the most emotionally-charged election days ever. What could this have in store for the financial markets? How might my portfolio be impacted?

Here are some issues that should be top-of-mind.

Volatility

Volatility has been climbing steadily leading into the elections; the VIX is trending upwards and currently 5 points higher than the lows set in mid-Aug because:

• The election outcome is uncertain — even though Biden is leading the polls, swing states remain divided, and Trump is still playing the ‘economy’ and ‘law and order’ cards very hard.
• The election outcome may be contested — mail-in voting is expected to see a massive increase for both parties, though heavily skewed to Democratic voters. Still, the delays that will be introduced by mail make it very likely that not enough votes will be counted by election day to produce a definitive result. Plus, Trump has not promised to hand over power peacefully in the event of a loss, despite being repeatedly asked.
• The building political tension, fuelled by chaotic debates, may cause knock-on social unrest in the coming month.

However, Trump is now hospitalized, in somewhat questionable medical condition, and confirmed to have been put on supplemental oxygen. Biden’s lead since the first debate has also widened to 14 points.

While nothing can be said for sure, these developments may signal a decreased probability of Trump winning, or even continuing his campaign. In the worst case scenario, there may be a scramble in the coming month for another candidate, or a delay in the election, or some other unprecedented measure. It appears that more uncertainty will be introduced to the system.

Why it seems impossible to trump Trump? | Data Driven Investor

However, there are known knowns, known unknowns, and unknown unknowns. We must remember that uncertainty is not a measure of change, but a measure of the unknowns. When Trump was diagnosed and hospitalized, his medical condition (and therefore election participation) became a known unknown. As we receive more information, it is not unlikely that more unknown unknowns become known unknowns, and the current known unknowns develop more probable outcomes.

For example, if Trump withdrawing from the election (now a known unknown) becomes a much more likely outcome, then the three election factors (uncertain outcome, contested results, social tension) I outlined above may become less significant. While his withdrawal may create more known unknowns about the leadership handover timeline in general, it could possibly decrease volatility.

Consequently, the ‘obvious’ prediction that volatility will increase from here on out may not be as inevitable as we’d think.

Cyclical rotation

It’s understood that a Biden administration would favor higher corporate taxes, which would weigh pretty heavily on the companies that have performed best in the stock market this year.

In general, Biden appears to be more concerned with Main Street, and Trump with Wall Street. The main driver of the stock market recovery this year has been technology growth stocks whose success is divorced from Main Street, and an increase in probability of a Biden win, along with the expected shift in policy focus to Main Street, may take some wind of the sails of these tech winners. Conversely, the companies that are heavily dependent on the real economy and which continue to suffer in the stock market may see a Biden win as favorable.

The Biggest Threat to the Stock Market: Economic Recovery

As a result, if the market believes that recent events regarding Trump’s health make a Biden win more likely, the cyclical rotation that has slowly been gaining momentum in the past months off vaccine optimism may receive more tailwinds.

The same reasoning applies to other policy choices on which the two candidates differ, such as healthcare. However, betting on a Biden win may still not be foolproof — not only is Trump’s recovery and return to the campaign very possible, his potential withdrawal from the election can also result in a delay to the entire election process which extends the amount of time we need to wait to get certainty on Biden’s win.

An increase in any combination of number, severity and duration of uncertainties is a recipe for big volatility spikes.

Fiscal support

We know that not everyone in the Republican party agrees with Trump’s ways, but the party nonetheless displayed a united front at the Republican National Convention. It seems like they think Trump still offers the highest probability of retaining power for the party, so he may be something of a necessary evil.

However, attitudes in the Republican party may change if the people lose confidence in his participation in or success at the election.

Every US market watcher (and disgruntled citizen, to be fair) have been waiting impatiently for the next round of fiscal stimulus. Even Fed chair Powell’s getting antsy. The hold up isn’t about whether the parties are willing to spend money, but about to whom exactly the money goes. I’m sure you’re familiar, so I won’t go into detail.

However, a diminished need to put up that united partisan front may help accelerate negotiations. If Republicans see the Trump train going up in flames, they may begin heading to the exit and meeting Democrats in the middle. Again, nothing is for certain, but a decreased probability of a Trump win may reduce the partisan headwinds Congress is facing, and help them actually accomplish something.

This, of course, is great news for both Wall Street and Main Street. The markets are slightly less concerned with who gets how much money, and more interested to know for sure that fiscal support will be given.

When all is said and done, this is an extraordinarily volatile time to be in the markets. No one (not even me — shocking, I know) can tell you what unknown unknowns may surface in the next few weeks. If you’ve considered these issues and are confident in your risk-reward, more power to you. If you’re not sure you want to be investing or trading now, you probably shouldn’t be.

Volatile periods separate the rookies from the experts — be aware of the risks and don’t make any amateur mistakes.

If you’d like to know how volatility worked for me, I’ve written this walkthrough of how I saved my trading account through the COVID-19 market crash.

How a novice trader made 25% despite a market crash

All information presented is for educational purposes only, and not to be construed as legal, tax, investment or financial advice.

Gain Access to Expert View — Subscribe to DDI Intel

Trump Is Sick: What You Must Know for Financial Markets was originally published in DataDrivenInvestor on Medium, where people are continuing the conversation by highlighting and responding to this story.

You and I both like money, passive income and financial independence. These and the promise of exorbitant riches were what drew us to investing and trading in the first place, but allow me to curb your enthusiasm a little.

The average retail investor underperforms the market by 1.5% a year.

The average retail trader underperforms the market by 6.5% a year.

Just holding an index ETF, instead of spending all that time learning and researching and agonizing, would’ve made you far more money.

Face it: we suck at this.

We’re all susceptible to ‘get rich quick’ schemes, but for too long we’ve projected those fantasies on investing and trading because:

• The US stock market is really accessible
• The US stock market has shown consistently amazing performance
• The deluge of stock tips and marketing scams only reinforce the narrative

Here’s the truth none of us want to hear: investing and trading are difficult skills.

Like the skills that earned us our day jobs, or the skills we’ve picked up as hobbies, we need to pay to learn before we’re any good. And if we want to invest or trade for a living, as many of us do, we’d better be top-tier.

But I’m not here to tell you to give up on your dreams. You can be successful in investing and trading if:

• You put in the work
• You’re patient and take baby steps
• You avoid rookie mistakes

Investing and trading are expensive to learn, so as novices we stand the best chance to succeed if we stay in the game as long as we can.

Unfortunately, too many people fall prey to the pitfalls I’ll be describing here and run out of steam — almost 80% of traders quit within 2 years.

These 10 mistakes are divided between investors and traders, but before we jump in, here’s a bonus one.

Mistake 0: Not knowing if you’re investing or trading

Even though both involve buying and selling assets, investing and trading are two completely different disciplines.

Investors calculate how much an asset should be worth, buy it if it’s priced too low (and vice versa), and count on price moving towards fair value over time.

Traders observe demand and supply factors affecting an asset’s price, and make bets based on calculations of probabilities, return and risk.

The investor looks at a company and wonders, “how much is this business worth?”

The trader looks at the same company and thinks, “how will the market price this stock?”

Investing and trading have vastly different styles, methods, risks and philosophies. The comparison is similar to rugby vs American football — you could confuse the two if you flipped through TV channels and caught a glimpse of either sport being played, but with a little experience you’ll quickly realize their gameplay and strategy are worlds apart.

If you haven’t decided if you want to invest or trade, you should, and you’re welcome to read this guide I wrote for beginners.

The Starter’s Guide to Investing and Trading

Investing mistake 1: Taking someone else’s word

Being an investing guru is a lucrative business.

Investing gurus don’t make money by giving you good predictions — they make money by grabbing your attention and selling you courses.

There are definitely high-quality, informed opinions out there, but like everything else on the internet, the signal-to-noise ratio is very low.

In all the interviews with successful money managers I’ve read or listened to, where the objective is indubitably not to sell me something, I’ve come across an enduring theme:

Always listen to and believe in yourself.

In Edwin Lefèvre’s Reminiscences of a Stock Operator, which is basically a biography of legendary speculative trader Jesse Livermore, this point is repeatedly and emphatically expressed.

A man must believe in himself and his judgment if he expects to make a living at this game. — Lefèvre

If you take someone else’s word on what to buy/sell and profit, you become reliant on them and will never actually learn how to invest.

If you take their word and lose, you feel worse because it wasn’t your fault, and have no clue how to recover that money.

Especially because investing is a longer term game, taking bad tips will cost you dearly both in terms of capital losses and opportunity costs.

Properly learn to do fundamental analysis, and make your own investing decisions.

Use other people’s opinions as learning resources which you can dissect, criticize and maybe incorporate in your own analysis.

Investing mistake 2: Believing history

You’ve probably seen this on legal disclaimers: ‘past performance may not be indicative of future results’.

There’s a reason that’s legally required — it’s true. But too many of us wilfully ignore it.

Imagine this: you see a stock ticker that has gained 27% in the last two months. Would you invest in it?

If you do, you might have just bought the 3x leveraged Nasdaq ETF (TQQQ) on 19 Feb 2020, at its peak before it ran headlong into a crash. In the next few weeks you’d have lost as much as 30% of your money.

Remember: investing is about fundamental value and not about how an asset has performed in the past.

It’s difficult, but you have to tune out historical performance. You’re in it for the long haul — leave the short-term momentum stuff to traders.

Investing mistake 3: Not getting out

Everyone hates being wrong, but us investors really hate it, especially because we’ve spent so much effort researching and developing our investment theses.

But we will be wrong many, many times in our investing careers.

If you’ve heard of a mildly-successful investor named Warren Buffett, you might be interested to know that he’s been very wrong, more than once.

I overpaid for Kraft Heinz. — Warren Buffett

Buffett messes up too, but he’s still in the game after almost a century of investing because he acknowledges when he’s wrong and gets out of the investment.

Losses are tough to swallow, but you absolutely need to cut your losses when your initial investment thesis no longer holds, so that you live to fight another day.

If you think your investment thesis is still valid but your losses are becoming too much to stomach, you might be investing too much for your risk appetite.

You might also want to consider getting out if you aren’t losing money but the investment performed like you expected for a long time — the opportunity cost is significant.

An investor in General Motors (GM) would’ve made nothing with their capital in the last ten years, which if invested in an S&P 500 index ETF, would’ve returned more than 15% annually.

Why Most People Lose Money Day-Trading (And How to Not Be One of Them) | DataDrivenInvestor

Investing mistake 4: Not staying invested

You’re thinking, “didn’t you just say to get out?” It’s confusing, yes, but stay with me.

Investors aren’t trying to time the market. We believe that sooner or later, the market prices of assets will gravitate towards fair value.

If we’re right about the value of a stock, it’ll play out over time, and we’ll only profit from being right if we stay invested. There are always stories about early investors in runaway successes like Amazon and Netflix who made multiple times their money, but that takes years, and staying in an investment isn’t easy.

There will always be corrections and breaks in long term trends, which spook the new investor into letting go of positions. Many will sell their long term holdings in a panic and end up missing out on the way back up.

Savvy investors, on the contrary, remain confident in their choices and treat these corrections as opportunities to buy more of their best investments on the cheap.

Time in the market beats market timing.

When you start losing money on an investment, how do you know if you should get out or stay in? Here are the critical things to consider:

• Is your investment thesis still valid? If something fundamental to your valuation has changed, it might be time to get out. On the other hand, sometimes falling prices are a result of market movements and have nothing to do with an individual investment.
• Is this the best investment opportunity you know of? If opportunity cost isn’t large, you don’t need to worry about freeing up your capital.
• Is the larger industry and market still supportive? You don’t want to be stubbornly long stocks if the economy looks like it’s barreling towards a recession.
• Is your portfolio diversified? It should be to start with, but if it isn’t, then things might get much worse, so consider cutting down.

If you passed all 4 tests, consider holding on to that investment, and maybe even adding to your position.

Investing mistake 5: Not diversifying

I pull out this quote almost every time I talk about investing, not because I’ve run out of ideas, but because it’s one of the most important and foundational concepts to learn.

Diversification is the only free lunch in finance. — Harry Markowitz

Diversification is a free lunch, because it helps an investor to increase risk-adjusted returns. In other words, it increases your potential return per unit of risk you take on.

I won’t elaborate too much on why you should diversify, because it’s well-documented. You can read more about diversification here.

Instead, I just want to highlight the fact that new investors don’t keep this in mind nearly enough, especially with the proliferation of leverage.

A lot of us tend towards a shoot-for-the-moon mindset, and it’s no thanks to the mindless drivel on even legitimate financial sites peddling ‘make 10,000%’ penny stocks or ‘the next Amazon’. Just look on r/WallStreetBets.

In true monkeys-with-typewriters style, eventually a few of these big swingers will profit. But for those of us who want to be skilled and sustainable investors instead of gamblers, remember that success is never built on a single massive bet.

Let probability work for you and not against you. Always, always diversify.

If you’re starting from scratch and want the most efficient way to diversify a portfolio, you might find my guide on ETFs and mutual funds useful.

A Complete Guide to Your First Investments

Trading mistake 1: Trying to time the market

Let’s kick off the trading mistakes section with the single biggest misconception of trading.

We’ve all looked at a stock chart and thought, “if I’d bought at this low point and sold at this high point, I’d be rich.” We get it into our heads that trading is all about predicting when those turning points happen.

No, nobody on earth can predict the future, but there are still successful traders everywhere.

Trading is not about getting the right timing to buy and sell.

Trading is about getting the right probability to buy and sell.

More specifically, by probability I’m referring to the expected value of your trades. This is simply a weighted average return, calculated by:

Probability of win * potential gain + probability of loss * potential loss

E.g. if there’s a 50–50 chance you’re right, but if your potential gain is $2 and your potential loss is -$1, expected value of this trade is $0.50. If you keep making this trade, you’d expect to gain $0.50 per trade on average.

Trading is about finding opportunities with positive expectations, either by a higher probability of winning, or a larger potential gain.

Think in terms of win rate (probability of win) and gain-pain ratio (potential gain/potential loss).

How confident are you that this trade will work? How much could you make on this trade, compared to how much you’re risking?

Stop trying to ‘time’ the market, because you’ll almost definitely be wrong.

Trading mistake 2: Not having a system

A lot of new traders don’t have a trading method and still wonder why they don’t make it big. I know I was guilty of this once upon a time.

Like I said, trading is about making positive expectation bets. If you’re really new to this, you’re wondering, “how would I know the expectation of my trades?”

You would by using tried-and-tested trading systems.

It may seem like trading is an ‘instinct’ thing, and the top players just have a knack for knowing what will go up or down.

A lot of this instinct is really a flow state that’s achieved through mastering a quantifiable, reproducible and verifiable method. Trading phenomenon Richard Dennis proved this in the 1980s by, for the first time ever, training complete beginners to trade. This became the Turtle Traders legend.

Today there are many systems out there that are like the original Turtle method: chart patterns, technical indicators, etc. Any system should have defined rules that tell you exactly when to buy and sell as well as where to place stop-losses — with this information you can test it for yourself and measure its expected value.

Remember, there’s nothing magical about traders, or about you. It’s a skill to be learned, and there’s always method to the madness. You wouldn’t go outside without clothes on, so don’t make random trades without a system.

Trading mistake 3: Not sticking to the system

Listening too much to others and not believing in yourself enough is a common problem for investors.

But for some reason, most novice traders believe in themselves too much, and as a result stop listening to their system.

When I first started trading, with every trade that I (obviously) got wrong I’d think, “I need to hold on, what if I give up and it immediately turns around?”

This is a documented phenomenon known as the disposition effect, in which traders are more likely to close winning trades and hang onto losing ones.

Obstinately sticking with losing trades is as bad a decision as staying in a toxic relationship, or refusing to give up on a failed startup. Knowing that, we continue to do so anyway — since trading is a short-term exercise, our brains are extra-sensitive to negative bias, and regard closing out a losing trade as making the loss ‘real’.

The truth is, as new traders we need stop-losses to prevent us from losing too much when we get trades wrong, and every good system contains rules that dictate exactly where to place them.

Too many of us, however, fall into the trap of wanting to be right, and either move our stop-losses out of the way or disregard them completely.

Remember: stop-loss rules are there to save you, so stick to them. Perseverance isn’t refusing to give up on a single trade, it’s continuing to learn and improve despite making some losses.

Trading mistake 4: Revenge trading

Revenge trading is making bad trading decisions after losing some money, out of anger or anxiety to recover those losses.

I remember taking some trades in the S&P E-mini for absolutely nothing besides ‘gut feel’ after being frustrated at a string of failed trades. It’s ironic that I gave up on my system as a result of, well, following it.

Revenge trading can be extremely damaging both to your mindset and your account, because they could throw you into a downwards spiral of losing, revenge trading, losing again, and so on.

It’s natural to be annoyed at bad results, but be aware of your emotions and don’t let them take over your account.

If you flip a coin multiple times, each flip is a discrete event and does not affect the result of any other flip. Each trade has nothing to do with the one before it or the one after it — as traders we have to trust in the probabilities and put away our feelings.

If you can’t compartmentalize those losses in your mind, don’t worry. Just walk away; tomorrow’s a new day, and you’re going to need money if you want to trade tomorrow.

Trading mistake 5: Death by a thousand cuts

This is a figure of speech that, when used in trading, refers to small losses that accumulate because of trading too much.

Usually a new trader trades too much out of regret and FOMO. Here’s how a typical scenario unfolds:

1. Trader buys a share of Apple, expecting it to go up.
2. Apple goes up a little. Fearing that it’ll come back down, trader sells.
3. Apple keeps going up higher, and higher, and higher. Trader feels the FOMO and buys another share.
4. Apple stops going up. Trader thinks, “it’s just a break, it’ll definitely keep going up like it has been.”
5. Apple declines. Trader panics and sells.
6. Apple keeps going down until it hits the price it started with. Trader thinks, “since it’s fallen all the way down here, maybe I should short it instead!” and sells a share.
7. Apple doesn’t go down anymore. After a while, trader gets frustrated and covers.

Trader made 3 round trips and a net loss, whereas if he had just been patient with his first long position he would’ve not lost any money or peace of mind. All of this could’ve happened in as little as 15 minutes.

While it might sound like an extreme example, this is exactly what a range-bound market with no clear trend looks like, and what an inexperienced trader is likely to do.

I’ve fallen victim to this type of over-trading many times, and at one point averaged 20+ round trips in a day despite not using an intraday trading method.

The ‘death by a thousand cuts’ hurts because it traps you in a negative feedback loop much like that of revenge trading, making your decisions subsequently worse, and costs you a lot of commission fees.

To avoid over-trading, you have to:

• Commit to your time horizon
• Stop staring at the screen

Most of us don’t (and shouldn’t) start with day-trading. A swing trader’s time horizon could be days or weeks, so once you’ve entered a trade and have a stop-loss in place, you don’t have to keep checking it anymore. Just move on to the next trade, or log off your account and do something else.

We all tend to stare at the screen because we’re nervous about our money, but that only makes us overreact to every normal market fluctuation and gives us the itch to do something.

Here and elsewhere, you’ll find that success in trading requires you to stay in control, be patient and trust the process.

Summary

Mistake 0: Not knowing if you’re investing or trading

Investing

1. Taking someone else’s word
2. Believing history
3. Not getting out
4. Not staying invested
5. Not diversifying

Trading

1. Trying to time the market
2. Not having a system
3. Not sticking to the system
4. Revenge trading
5. Death by a thousand cuts

Want to see a real example of the ups and downs of trading? Read about my experience in the article below.

How a novice trader made 25% despite a market crash

All information presented is for educational purposes only, and not to be construed as legal, tax, investment or financial advice.

Gain Access to Expert View — Subscribe to DDI Intel

10 Ways to Get Broke Quick was originally published in DataDrivenInvestor on Medium, where people are continuing the conversation by highlighting and responding to this story.