Advice comes in many forms: there’s good and bad, welcome and unwelcome, requested and thrust-upon, and the type that comes wrapped in small fortune cookies. However lately I’ve been noticing a lot of “advice” that is really just anecdotes phrased as advice. This is by no means new – I’m sure many of my fellow Millennials know the stereotype of a Boomer telling us “youngins” how he got a job “back in the day” – but when marketed well, this pseudo-advice becomes quite persuasive. More than that, many whom I consider peers will actively seek out these anecdotes. I’ve tried to fight against this tide as I can, but figured it would be wise to collect all my thoughts here to save myself the trouble. After all, as a good programmer I am inherently lazy: better to write my point once than in a hundred duplicate fragments.

Real Estate Made Simple

Graham Stephan used to be a huge guilty pleasure of mine. I emphasize past tense here because I have some notion that his content has continued to evolve since he dropped off my Youtube feed1 and I don’t want to give the false impression that I’m familiar with anything he has posted since mid 2021 or so. For those who aren’t familiar with him, Graham Stephan is a very successful millennial realtor, real estate investor, and Youtuber. While he has released plenty of silly videos, the vast majority of his content essentially revolved around investing and financial advice2. At the time, most of this was focused on real estate: he’d go over his various deals, “house hacking” tips, renovation work, etc. If you want to get into real estate investing, he was honestly a great source of knowledge and I feel as though I learned many things there that I never would have thought about.

Over the course of his videos, Graham laid out many of the details of his path in wealth. He skipped college, worked as a realtor in the Los Angeles area, then started buying properties in the early 2010s. Those properties exploded in value, his realtor business boomed (correlated with the rise in LA real estate), he bought more properties, those had huge gains as well, ad nauseam…. By all accounts, I would consider him to be a good real estate investor. He’s certainly a successful one. That being said, this success is almost certainly not replicable and thus makes for bad “advice.”

Let’s say we lived in an alternative timeline where Detroit, Michigan had the biggest real estate boom of the 2010s in the US. We can go even crazier and say all other major metros had a reduction in population as every young high-skilled worker flocked to this mega-Detroit. Now let me tell you that I know of a real estate investor who managed to beat the S&P500 every year from 2010 until 2020: what city would you guess she lived in? An investing genius might be able to make good returns in a declining city, but we would expect the best returns to be made by the best investors in the highest return city. The only problem is that we can’t know a priori what cities will have the best markets. An even bigger problem is that we can’t know ahead of time how good a year will be for the market. Let’s say that Graham had started his career in 2006 rather than near the end of the GFC, we wouldn’t expect his record to be nearly as good.

While the Detroit example above is obviously extreme, it isn’t as extreme as you might think. The average real estate property in the US barely outpaces inflation in the long run. Houses in the US are on average a good store of value but not a good investment. And I want to emphasize on average it is a good store of value. Real estate gains a lot in some cities and loses a bit in large tracks of the country. If you aren’t in the correct city, then you likely won’t have this kind of large property appreciation. And this is assuming you have the relevant skill and experience to pick out the best properties in your area (better than anyone else attempting to do the same).

FIRE Advice or Giving Walkthroughs in a Rougelike

Fueled by Millennial job market fatigue and a decade of nearly uninterrupted stock market growth3, the FIRE (Financially Independent, Retire Early) community has grown to become one of the preeminent Millennial/GenX investing communities online. Exemplified by blogs such as Mr Money Mustache (MMM), Early Retirement Now (ERN), as well as subreddits such as r/financialindependence, this community can best be summarized as “Bogleheads on steroids.” This community deviates from WSB and other gambling + meme stock communities, as well as more traditional stock-picking communities, by focusing not on investment allocations but on savings rates. Like Bogleheads the FIRE community overwhelming pushes total market funds4, but while Bogleheads try to maximize savings rates for a retirement around the typical 60/65yr age, the FIRE community will push savings rates to 30%, 50%, sometimes as high as 90% to expedite the time to retirement. “Financial Independence” is defined by the community as the point at which your investments’ annual returns are sufficient5 to cover your living expenses in perpetuity (or at least however many decades you expect to live).

FIRE communities are an interesting mix of people in different stages of retirement saving or spending. At each stage, you see starry-eyed members looking up to people one step along the ladder. People want to get the gratification that comes from hearing about how well others have done and project that into their own extrapolated wealth. This makes for a ripe opportunity for “anecdotes as advice” to propagate like germs in a petri dish. One particular saying that I see a lot is some variation of:

The first million is the hardest, after that things will double quickly.

Now some of this is true. The beauty of compound returns is that the absolute amount a portfolio grows in a year increases with portfolio size. A 10% return on a $100k portfolio is $10k profit, while on a $1M portfolio it’s $100k profit. In fact, as you save more and more you eventually reach a point where the returns on your portfolio completely dwarf your annual contributions. This is the simple beauty of investing.

On the other hand, the rate of doubling doesn’t actually change based on portfolio size. If anything, it gets slower as your contributions matter less. If you have $100k saved and are contributing $30k per year, then you’ll double your portfolio in under 3 years with a 10% contribution rate. When running those numbers on a $1M portfolio, it’ll be much closer to 7 years to double. Now this isn’t an entirely fair comparison, as people increase their savings, they tend to get further along in their careers and earn more and more. This should also translate into a higher savings rate, assuming their cost of living doesn’t explode. However, there is a much more important explanation at work.

While the S&P 500 has averaged 10% (nominal) returns in the long run, performance year over year can vary wildly. This is especially true over the past 5 years or so. Since 2017, the S&P 500 has had annual returns of 21.83%, -4.38%, 31.49%, 18.40%, 28.71%, and -12.95% so far in 2022. A $1M portfolio at the start of 2019 would have ended 2021 at $1.845M without any additional contributions. This pandemic has been an incredibly unique and volatile period for returns with some insane individual year returns.

I talked a bit earlier about the many FIRE blogs out there. Other than a couple of “reddit regulars” in the various subreddits, these bloggers are the main source of truth that the FIRE community (mostly those still in the accumulation stage) look to for advice. ERN (and likely others) have pointed out we shouldn’t look at such individuals as role models since many – if not all – of them monetize their blog, which provides sufficient leeway in withdrawals. However there is, in my opinion, a more nefarious risk here: all of them retired within a similar time frame. This combined with the simplistic portfolios in the community (>80% correlated to US Large Cap), means that they will all largely have similar experience with withdrawal rates and returns. This is about as far from an IID sample as you can get! Even worse will be reading through the annual review sections of these blogs. Take 2019 recaps for instance, where the S&P500 returned 31.49%, do you think a 4% withdrawal rate proved any issues for any of them this year?

Now none of this is a condemnation of the type of investing strategy offered by the FIRE community. If you believe in some form of the Efficient Market Hypothesis, then some form of buying and holding a market cap weighted allocation of the (global) stock market portfolio, combined with a selection of bonds6, is optimal or close to it. Just know that your returns at your stage of FIRE should be different from those who came before you, and far different from those who come after you.

Temporal Survivorship Bias

What do these examples have in common? They’re an example of what I call “Temporal Survivorship Bias” or in other words, Survivorship Bias in which a particular time period has a huge influence on picking the survivors. Rather than “normal” Survivorship Bias, where some people will “win” while others lose, Temporal Survivorship Bias will have a huge number of winners all following similar strategies. Everywhere you look, you see examples of others having succeeded and have to resist the temptation to join them. Because at the end of the day, there’s no guarantee that things will work the same for you. Looking at past results gives you a false sense of the risk involved in (and expected returns of) an investment or strategy.

A success story has no risk. By the very fact that it’s a success story, you know that the strategy worked out. No matter how good or bad things started, they succeeded in the end.

The Synergy of Temporal and Geographic Bias

All the trappings of Temporal Survivorship Bias magnify when there’s also a strong Geographic correlation. In these cases, not only is there a time period in which a certain strategy does well, there is also a particular geographic area (generally your area) that has a strong influence on success. Real Estate “suffers” from this greatly. If your city’s real estate has exploded in the past 10 years, then every real estate investor you’ll talk to will have absolutely crushed the market. You’ll find people with double digit property appreciation every year on a property they bought on 5x margin (say putting down 100k on a 500k property, then seeing it rise $75k every year for a decade). Join a real estate investor’s group and it’ll be full of success stories.

So Where do We Go from Here?

So where exactly does this leave us? What advice is valuable, what advice isn’t, and how do we tell the difference? Well let’s start with the most boring advice: near universal maxims that don’t depend on singular events. Stuff like getting a job with a mix of security, compensation, and personal satisfaction that allows you to enjoy the work for long enough to get the most financial reward out of it. This can also extend to a career and university education: find something you can specialize in that pays dividends over your life. More boring still, the higher your savings rate7 the more and faster your savings and investments will grow. Tax advice is well beyond the scope of this blog, but find ways to optimize for your situation: weigh Roth vs Traditional retirement accounts, max out HSAs if you have that option, consider which investments you wish to place in tax-advantaged vs taxable accounts, etc. The Bogleheads Wiki has way more information on this than I could provide, and for many a personal advisor8 will offer even better, tailored advice. None of this is exciting, but that’s why it’s eternally relevant.

Other advice worth considering is ones backed by rigorous theory, even if – nay especially if – it hasn’t panned out in recent memory. Read up on Modern Portfolio Theory (MPT), the Capital Asset Pricing Model (CAPM), and Post-Modern Portfolio Theory (PMPT), then learn about the issues with all of them. If you’ve got the time, I recommend giving this episode a listen on the evolution of these ideas. I’m personally a fan of Factor Investing and tilt pretty heavily into Small, Value, and Quality/Profitability factors9. If you’re looking towards (early) retirement, then perhaps the most important thing you can read up on is withdrawal rates: how much can you “safely”5 draw down from your retirement accounts without going bankrupt. ERN has the most thorough treatment of this subject that I’ve ever seen and I highly recommend giving it a read. Again here, it’s important to plan for as many situations, both historical and hypothetical, as you can.

Beyond all of this, non-financial advice tends to be way more persistent. Find a love of life beyond materialism and consumerism. Try new hobbies, get in shape, and make memories you’ll look back on decades down the line. Personal finance and retirement planning is interesting stuff, but the best part about it is giving you the freedom and stability to support your true passions.

  1. Coincidentally I think the last video of his I saw was about him divesting from new Real Estate projects. ↩︎

  2. “Financial Advice” has a very heavy legal weight to it and he makes it very clear that none of his videos should be taken as being financial advice, just information. However, I don’t think Graham would deny that many people turn to his content as advice and much of his content was focused on helping others break into real estate. As such, I will continue to refer to his content as advice for the purpose of this blog. ↩︎

  3. I wish I wrote this back in 2021 ↩︎

  4. With perhaps too much bias for US Large Cap stocks ↩︎

  5. With some personal level of risk ↩︎ ↩︎

  6. People will argue for ages as to what type of bonds you should have. BND/BNDW and Bond (funds) with maturity dates aligned with your time horizon are good choices to start with ↩︎

  7. The percentage of take-home or after tax income that you don’t spend in a given year ↩︎

  8. You should be using a fee-only advisor for this! ↩︎

  9. But it’s worth noting that the risk of underperformance and higher drawdowns is much higher with many factors. ↩︎