All of the financial knowledge in the world ...

[BigBangWeary]

I apologize if this has been discussed here before, but has anyone else come to believe that achieving FIRE is something like 20-30% knowledge and research, and about 70-80% behaviour and willpower? Many of my colleagues are comfortably making six figure plus salaries, but at the end of the month I hear them complaining about not having enough. One could assume that they are socking it away into investments or real estate, but after numerous coffee room chats, and after work cocktails, I have come to realize that the vast majority of my co-workers are putting shockingly little towards either.

I would say that most of my closest workmates know that my wife and I are serious about investing and saving, and they are always surprised by how much we spend on groceries per month, or the fact that I bring in my own lunches, or that I monitor how much I spend on alcohol per month, etc. At times, I feel like an alien species that must really be living in a different world.

Occasionally, I get asked about investing by these same people and what they should do, but when I start talking about paying yourself first, etc. the automatic response is, “Oh, we don’t have much to spare for that.” Really??! I work in the same job, live in the same country, and pretty much socialize, travel, and entertain in the same way you do. We just don’t buy every new device that comes on the market, we shop for value, plan our shopping in advance, and we track our expenses. As far as I can tell, that’s the difference.

I am starting to really believe that unless you can change your attitude, all the information in the world will pretty much be wasted on someone who cannot be consistent when it comes to their behaviour. Would you agree?

 

[2B]

I disagree with your estimate of 20-30% knowledge and research. It really only needs a belief not unlike a religious commitment to basic principles of indexing. I'd lower it to 10% and even that may be too high. In many ways the more you know the more you can cause yourself problems. I wish I had all the money back I've lost in individual stocks, commodities and technical analysis.

I see the same thing you do as to the finacial status of my peers. We make a pile of money for doing very little with almost no stress. The number of late model, fancy cars continue to flow through our parking lots. I hear of their children attending high priced colleges. My peers are where they are because they are very math literate so that's not the problem. Unfortunately, they have so they spend and, in many cases, spend even more.

DW and I periodically talk about the estimated finances of her sister and husband. He has moved between several high level C-suite positions and they live very affluently. I've always been of the opinion that they are mega-rich or living on a shoestring. Recently, DW had a discussion with her sister that indicated it's much closer to the shoestring. The whole picture was not revealed because my SIL suddenly stopped and said she can't discuss their finances.

 

[Which Roger]

I agree with the percentages more or less. Even someone who makes poor investment choices, like chasing performance or paying an adviser big bucks to handle their money will still come out way ahead of someone who spends everything.

But we should remember that ER is not a goal for the majority of the population, even among those who have the financial means to FIRE. Someone who wants to retire at age 65 or later doesn't need to save as much as someone who wants to retire at 50, and has many more years to save.

If I had planned on w*rking until 65, I would have had a much different spending pattern. I would probably have bought a new vehicle every 3-4 years, and spent a lot more on home upgrades and the latest gadgets.

 

[karluk]

I apologize if this has been discussed here before, but has anyone else come to believe that achieving FIRE is something like 20-30% knowledge and research, and about 70-80% behaviour and willpower? Many of my colleagues are comfortably making six figure plus salaries, but at the end of the month I hear them complaining about not having enough.

You probably won't get a lot of disagreement from this forum about the critical importance of attitude and lifestyle choices on the ability to retire early. It will be harder to reach a consensus on the amount of credit to give to investing knowledge. It's easy to discount the value of such knowledge - after all, it's not rocket science to invest in low cost index funds, avoid market timing and rebalance periodically, but the fact remains that most investors have proven to be incapable of adhering to even such basic investing principles. According to the following chart, the average investor has experienced only 2.1% annualized returns over the 20 year period 1992-2011. Considering the overall performance of the stock and bond markets during this period, it's reasonable to expect 7% or more returns during this period.

Avoiding a 5% or so market underperformance is not something that can easily be dismissed. I would tend to give my own reasonable (but not spectacularly successful) investment decisions full credit for the role they played in my own early retirement.

So I would tend to give equal credit to the following two factors. Get one right and the other wrong, and there's no chance to retire early.

1. Live below your means and save as much as you can.
2. Invest wisely and watch your money grow.


http://static3.businessinsider.com/image/50be64796bb3f7ca5b00000f-618-464/moneygame-cotd-120412.jpg

 

[samclem]

I think that the factors of "investing knowledge" and "saving behavior" are complementary to some extent. I understood the "magic" of compound interest/growth fairly early on, so it was easy to see the big advantage of saving some money for a goal that was decades away. Later I came to understand a bit more about asset classes and my (in)ability to time the market, but it never shook my belief that eventually there would be an "average" annual return and that investing money early would assure I could gain from it.
If a person believes it's possible to find a system that allows them to routinely pick stocks that will double in a year, or that the stock market is nothing more than a big less-than-zero-sum casino, or that successful investing is very complicated and only for "fat cats", then I can see how it would be hard to get motivated to routinely put away money. Why bother? Add that to the slick advertising for consumer goods and the "you've earned it!" mentality pushed by Madison Avenue, and we get the results commonly seen today.

 

[jIMOh]

30-70 seems like a decent split...

30% knowledge, 70% behavior...
part of the knowledge is knowing what behavior is good or bad
part of the knowledge is knowing account types, investment types. and government laws
I believe the tougher knowledge requirement is educating oneself about issues specific to them which don't apply to everyone.
Examples might include long term insurance, pensions, where to retire, 72t, knowing why the roth conversion rule is one thing one year, and a different thing the next year... meaning its possible to be educated once, then have to "re-learn" the topic because something changed based on a set of assumptions.

Remember if 75% of the people use 75% of the information, that only applied about half the population. The tough part is knowing if you are part of the 25% of the population, or finding that deeper 25% of information which few people know.

 

[Midpack]

I don't know what the % split is, but I agree wholeheartedly. I phrase it a little differently, I submit that the reason unsuccessful (DIY) investors are unsuccessful is lack of discipline more often than lack of investing methodology. The methodology is simple. Here was my last (of several) ill conceived attempt to discuss the topic http://www.early-retirement.org/for...on-diy-investors-have-poor-results-67930.html

 

[Ed_The_Gypsy]

I disagree with your estimate of 20-30% knowledge and research. It really only needs a belief not unlike a religious commitment to basic principles of indexing. I'd lower it to 10% and even that may be too high. In many ways the more you know the more you can cause yourself problems. I wish I had all the money back I've lost in individual stocks, commodities and technical analysis.

Agree and disagree.

Certainly, the more you know, the more you can cause yourself problems is a great truth.

However, I do think that after studying investment carefully, after a time many of us wake up and figure out that it ain't that hard! The problem is that it takes a long time to come to that revelation. I am trying to teach my kids what I have learned so they don't waste as much time as I did. THEN, it becomes a 10%/90% or 1%/99% thing. Discipline is the hard part.

 

[BigBangWeary]

Midpack I see what you were trying to do with that thread. Sometimes it is hard to get your point across online. Been there!

When I do try to talk to my peers about wealth accumulation the conversations always circle back to some hot stock tip or the biggest return they can get for a particular investment. The truth is, what 'success' my wife and I have had on our journey so far have largely been a result of other areas of the wealth accumulation process.

We used the resources available to us to get the best education we could and sought jobs that would pay us well for our time. We then leveraged this by moving to an area that would compensate us even more for the same work. We did our best to pay off our student loans as fast as possible and avoided further debt. Since our university days we have done our best to avoid too much lifestyle creep and banked any money coming to us via promotions or other raises. Sure, we have invested in traditional 'investments' for the last 6 years, but I would say that only about 2-3% of our net worth is a result of this.

I guess my point is that many people (especially those just starting out) get so caught up trying to grow their money through 'traditional investing' alone, that they fail to learn the importance of the other habits and behaviors involved in the process of wealth accumulation.

 

[travelover]

I've tried to help various people with investment advice over the years and am convinced that it is a fool's errand. They don't want to know how to accumulate wealth if it involves any sacrifice on their part or if it will take more than a month.

 

[FIGuy]

"I've tried to help various people with investment advice over the years and am convinced that it is a fool's errand. They don't want to know how to accumulate wealth if it involves any sacrifice on their part or if it will take more than a month."
+1

Quite a few of my silicon valley coworkers make in excess of 1/4 mil a year and I believe spend every cent. I tried to suggest another path, but have given that up now. New cars every few years seems to be the biggest drain, but basically every single aspect of their lives appears to be an opportunity for speculative consumption/ fitness indicators to be shown off. A $4k mountain bike for a new hobby (trail riding). The new electric BMW, complete with optional $6k 2 cycle range extending motor "just in case". Seriously, a moped engine spitting blue smoke on an electric car!!!

My wife and I think of how much effort we put into investing and how we've worked to reduce our cost of living and we both know folks who blow 2x our income on starbucks, 2 million buck "can never drop in price" SF Bay houses, and the latest I-whatever. They definitely aren't happier. I know that. They whine about money like it's some 3rd world nightmare over there.

I read an interesting book called "Spent" that looked at the basis of consumer purchases and how psychology is transforming marketing. Very good book and I highly recommend it. Those devils are getting very sophisticated and it has paid for itself a thousand times over in getting me off the treadmill. The average consumer doesn't stand a chance...

Plenty of folks over at the "mr money mustache", "Early retirement extreme", and many other blogs feel like you do about wasteful consumerism.

 

[Bestwifeever]

...we should remember that ER is not a goal for the majority of the population, even among those who have the financial means to FIRE. Someone who wants to retire at age 65 or later doesn't need to save as much as someone who wants to retire at 50, and has many more years to save.

If I had planned on w*rking until 65, I would have had a much different spending pattern. I would probably have bought a new vehicle every 3-4 years, and spent a lot more on home upgrades and the latest gadgets.

I think this is key. Some people want to enjoy their earnings as they earn them and some defer the enjoyment to become FI earlier. Most people here are in the second group. Most people in the real world are in the first group.

 

[Keim]

I spent about 1 year learning finance basics. I hope to be about 50 when I reach my 1st million. That tells me it is about 2% knowledge and 98% behavior and willpower.

I unknowingly had the behavior and willpower well before I decided to get the knowledge, which was to my advantage. My thinking went like this: Hmm. I've accumulated this stack of money. I should figure out what best to do with it.

 

[cinman2000]

How does the saying go? "Moderation in all things, including moderation"

We both worked hard to have successful careers, raised two kids and spent a lot of money on the things that were important to us. Different things are important to different people. Not working til 65 was important to us, so we saved and learned about investing along the way. We could have got by with less the last 30 years and maybe retired 5 years earlier. Having a net worth to now retire at 54/52 and maintain the same lifestyle was our choice. I have a ton of respect for those that choose to live more frugally and a little less for those who "choose" to keep up with the Jones'es, but I do respect that each of us have their own choice.

 

[Walt34]

I read an interesting book called "Spent" that looked at the basis of consumer purchases and how psychology is transforming marketing.

One of the more enlightening classes I took in college was one in marketing. It was all about "creating value in the mind of the consumer" i.e., making them "want that". The concept of fulfilling a need or useful function was completely irrelevant.

The takeaway was that people smarter than me spend entire careers designing just the packaging to make me want the "thing", whatever it is.

I still think "Pet Rocks" is the classic example of the power of marketing.

 

[jollystomper]

I apologize if this has been discussed here before, but has anyone else come to believe that achieving FIRE is something like 20-30% knowledge and research, and about 70-80% behaviour and willpower?

I might differ on the exact percentages but I do agree that behavior and will power are in the the majority. I would argue that is true of any type of achievement - it is not just knowing, but steadily applying that knowledge. My best real-life example comes from sports, where one of my brothers had a chance to meet Michael Jordan at the height of his career. Where did they meet? At a gym, at 6AM in the morning - where Michael was shooting hundreds of free throws, something he continued to do every day even though he was a superstar (and which I think he still does even now).

the biggest challenge I observe to behavior and willpower are greed and impatience. It seems easier to persuade many to invest in something high risk when an quick, "outrageous" return is promised - as compared to telling them to patiently put away their money, their reward will come down the road in "many" years.

 

[sengsational]

To the OP... If you are really interested in exploring this, you might pick up a classic..."The Millionaire Next Door", or a more recent one "Millionaire Teacher". The bottom line seems to be that a hell of a lot of wealthy people have no desire at all to 'look wealthy'.

 

[scrinch]

We have aggressive equity hawks on the board and we have equally vehement cash doves here. And we have everything in between. Since these people are all driving toward the same thing (FIRE) I'd have to say the knowledge and research part of the equation is far less important. After all, they have LBYM (behavior and willpower) in common, but they're investing (the knowledge and research part) very differently.

If you save money, you can make it grow by investing in many different ways. If you don't save money in the first place....well, you have to be the chairman of the Fed and just print what you need for retirement!

 

[Asher Aion]

No one has ever accused me of being the sharpest knife in the drawer, so research and knowledge accounts for a low percentage for my scenario. However, having a parent pass away at a relatively young age gave me the motivation to get my act together in the spending department. I feared leaving behind DW with a debt mountain and few options to raise the little ones. To each their own I guess

 

[BigBangWeary]

Thanks sengsational, although I have read both the Millionaire Next Door and Millionaire Teacher. Good reads for sure.

Cinman2000, you make a good point. My observations are not so much about the extremes on either end of the spectrum, but more the average person today. I completely support and believe in moderation. I have seen a few people in my life pass away long before their time, and in these cases it wouldn’t have been worth it to be too aggressive with their savings. With that being said, I think we are about to see an entire generation in the West (and I am Gen X/Y) come to the end of their working lives without the safety nets of years past. I think it might have been better to let the economy crash in 2007/2008 so that we had adopted the healthy attitude of our grandparents. Far too many people seem to be living day to day with the assumption that ‘the government will look after me’, or I can just borrow for it if I need to. When I see people who could easily provide for themselves in the future just blowing it all, it does make me wonder...