#673: Why Young Investors Emphasize the Incorrect Aspects [GREATEST HITS]

      Welcome to Greatest Hits Week – five days, five episodes from our archive, spelling out F-I-I-R-E. Today’s second letter, I, represents Investing. This episode first aired in April 2022, but the framework we discuss remains among the most practical guides we've provided for accumulating wealth at any age.

      Nick Maggiulli is with us to explain why many young investors fixate on the wrong metrics and to introduce his Save-Invest Continuum, which illustrates precisely when savings outperform investment returns and when that shifts.

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      In his twenties, Nick Maggiulli spent a considerable amount of time fixating on his investment portfolio, adjusting his asset allocation, estimating net worth projections, and creating complex spreadsheets. At the same time, he was spending $100 every weekend partying in San Francisco.

      It took him years to recognize the absurdity of this behavior. His annual investment returns on his modest $1,000 portfolio might yield him $100, which is equivalent to what he would spend in one night out.

      Maggiulli joins us to clarify why young investors concentrate on the wrong aspects and provides his framework for determining when to focus on saving versus investing. He introduces the Save-Invest Continuum, which compares your projected annual savings to your anticipated investment returns.

      When starting out, your saving capacity greatly exceeds any investment gains. For instance, a $6,000 annual saving potential surpasses a $100 investment return every time.

      We delve into the mathematics of saving 50 percent of future raises, not out of guilt or deprivation, but to achieve lifestyle balance while growing wealth. This guideline only applies to actual raises above inflation. If you receive a 3 percent raise concurrently with a 3 percent inflation rate, you have not truly made any progress.

      The discussion shifts to unconventional income-generating assets. Aside from stocks and bonds, Maggiulli explores investing in farmland, which provides returns that are uncorrelated with standard markets. He recounts a story about someone who purchased the royalty rights to Jay-Z and Alicia Keys’ "Empire State of Mind" for $190,000. The song earned $32,733 in royalties the prior year, indicating an 11 percent return if that income remains stable.

      We investigate why 85 to 90 percent of your portfolio should generate income via dividends, rent, interest, or business profits. Maggiulli keeps his speculative investments, including cryptocurrency, art, and individual stocks, to less than 10 percent of his net worth. He admits that his two selected individual stocks have declined by 60 to 70 percent, illustrating his point about steering clear of stock picking.

      The episode underscores that time is your most valuable asset. Warren Buffett would likely be willing to trade his entire fortune—and even incur debt—to be 35 again.

      This viewpoint influences every financial decision, from selecting income strategies to choosing between assets that simply appreciate versus those that provide income while you sleep.

      Resources:

      Afford Anything podcast episode #375

      Timestamps:

      Note: Timestamps may vary across different listening devices due to dynamic advertising durations. The provided timestamps are approximate and may differ by a few minutes based on changing ad lengths.

      (0:00) Nick’s regret over focusing on investments while neglecting returns from partying

      (4:20) Explanation of the Save-Invest Continuum

      (7:00) When savings are more crucial than investment returns

      (11:20) Balancing both saving and investing in midlife

      (12:00) Crossover point: when investment returns surpass spending

      (13:00) The 2X Rule for guilt-free spending

      (14:20) Save 50 percent of future raises

      (19:30) Five strategies to increase income

      (21:20) Selling time versus selling skills

      (23:00) Teaching and product creation for income

      (25:00) Advancing the corporate ladder

      (26:00) Transforming human capital into financial capital

      (27:20) Income-generating vs. speculative assets

      (31:00) Allocation for individual stocks and cryptocurrency

      (34:40) Basics of farmland investing

      (36:20) Example of royalty investing

      (40:20) Art and non-income-generating assets

      (42:00) Strategies for inflation and debt

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