I can’t thank you enough for keeping this blog. My traumatic early experiences with money (or the lack thereof) have made me really think about finance in philosophical/functional terms. I believe financial independence tends to be the goal for very precocious, “think outside the box” independent types. Once again, please keep up this blog… it’s amazing the things I have been learning. Your philosophy and outlook on simplifying, using the system (not letting it use you) to take control over one’s life and finances, and the no-bullshit pragmatic “be time rich, not consumer-goods-rich” perfectly meshes with my quality over quantity perspective on life.

Thanks again!

~ poor college student

@ sjean - I think I was born to disagree, so there will be a post on index funds some day.

@ dna - there are indices for those strategies as well I believe. Even the S&P 500 is quite narrow. Only ten companies (mostly energy and internet) make up a quarter of that index. In terms of degrees worth pursuing, I did not mean in terms of what is important but rather what people will pay for. I have a phd in a semi-salable field, but I realize that I’m making about as much as a bachelor in a highly marketable field (and I have less options in terms of jobs, not more). Frankly, I had no clue about salary ranges and didn’t even bother to look when I signed up and I wish I had somehow gotten a reality check. Of course a doctorate means that one had other freedoms and riches and this is the main reason why so many salaries are depressed compared to industry.

@ fathersez - I absolutely think that choosing a spouse can be like choosing an investment or a fund. It is a very personal/psychological choice but at the same time one has to consider the present, the future and how everything fits together.

@ ron - (The discussion is “Grokking the Strange Land” at thehonestdollar.com). Thanks for the comment. That will take some time to digest. Luckily I’m not looking into buying for at least another few years and hopefully at that time the bubble will have worked itself out.

You touch on the subject in this post so allow me to add a few thoughts of my own:

You wrote: A house is a consumer object. It’s used/consumed, wears down and has to be replaced. People only get rich buying and selling houses during good times and they go bankrupt just as often when good times turn bad. Generally nobody can predetermine when good times become bad and vice versa.

Well, that is, indeed, one half of the story. A house is a consumable but it is also a store of value that, in general, appreciates. And people get rich in real estate not just by buying and selling in good times. My brother invested in residential real estate for forty years. His strategy was buy and hold and he weathered at least three down markets.

He passed away on the young side leaving an estate of almost $12,000,000, all of it generated by his RE holdings. And, when he died, his monthly NET income was over $30,000 in rents alone.

And, as you write and just like in the stock market, it is usually not a good idea to try and time the market because no one has ever proven to be able to do so consistently. So we agree, if you stay invested in either the stock or RE market for the long-term, the odds are (based on historical returns) you will prosper.

You wrote: A house is an expensive proposition, so do NOT speculate/gamble on the direction of the house price. In other words, do not take out a loan, hoping that house prices will go up.

Buying a house is only expensive if your purchase is not accomplished in a fiscally prudent manner such as buying more house than you can afford, more than you need, or using some funky financing scheme. And, besides, owning a home is as much a lifestyle choice as it is a financial one: Surveys and statistics show that homeowners are generally happier and wealthier than renters.

And even in the hyper-markets it is almost always possible to find something that makes sense to buy. Now, should you speculate in housing? That depends on your level of expertise and financial resources. A blanket statement that one should never speculate in RE will not apply in every situation.

You wrote: Historically, house prices rise with inflation (at 3-4% a year) and not the 15-20% we have seen during the past few years. In addition, historically what goes up must come down. Things revert to their normal. Otherwise there would be no normal.

Historically, housing price appreciation has exceeded the rate of inflation by a point or two; and sometimes it will blow the rate out of the water (both ways). And what is “normal” is that markets go up and down on an incline (stocks and RE, in particular).

My parents bought their home in San Diego for $11,000. Since then the value has gone up and down but it will never be sold for $11,000 again, ever! And, presently, it would sell for $350,000 or so (down from over $400,000). And five years from now it will probably sell for over $400,000 again.

You wrote: Approach house buying as if you were investing for the long term. The NAV formula can be used. With the current numbers, if the house price is lower than 110 times the monthly rent for a similar house (look around), you should be buying the house. If the house price is higher than 110 monthly rents, you should be renting. Currently, the most financially sound strategy in the US is generally to rent.

Real estate prices and NOI rates, in general, are local and specific to the market and the deal. And even in markets where NAV applies, there will still be homes available in that market where buying still makes sense.

According to NAV one could conclude, “Do not buy in San Francisco.” But why not, if you can afford it, plan to be there for the long-term, and you prefer to live in a home of your own and can accept any additional expense (above the cost of renting) as an acceptable cost of living the kind of life you want to live?

You have posted about the difference between rich and wealthy; IMO, owning a home of your own is part of a rich life and we here in the US should be profoundly grateful that you still don’t need to be wealthy to own a home of your own.

You wrote: Currently, the most financially sound strategy in the US is generally to rent.

Another blanket statement that is difficult to support with the facts. For some people, this is a great time to buy; a down market will always present opportunities. That is the basis of the concept behind dollar-cost averaging in the stock market.

I just bought a house for $95,000 that had originally listed for $178,900. The sellers were happy to get rid of it and I was happy to help them. Going into the deal, I made more money than the average US household will earn by working all year!

Enjoy reading your posts. Thanks.

This, if done right, should compensate a number of mistakes we make on index or non index funds.

The rule I like, (actually given by a close friend) was also to search inside and ask ourselves if the intended spouse would make:

a) a good wife/husband
b) a good friend to us
c) a good mother/father
d) a good in law to our brothers and sisters
e) a good daughter in law to our parents
f) a good friend of our friends

What do you think? Can choosing a spouse be like deciding on a fund?

With regard to your advice on index funds, it makes a difference that your advice is aimed at living off of dividends within a relatively short amount of time (within 15 years), so most indexes would not be appropriate with this goal. For example a total international market fund is not going to pay over 2.5% dividend because of it’s inclusion of growth, mid- and small-cap stocks. And some indexes are exceedingly narrow these days (index of allergy and dermatology stocks offered by HealthShares). A large-cap value index might work for the purposes of your goal, however, if the fees are very low.

One point on which I disagree is with the advice about which higher degrees are worth pursuing. I have 2 doctoral degrees from the “useful” list, and I love my work; but I wouldn’t say that I consider what I do more or less important than, say, an archaeological researcher/academic. Humans have always engaged in creative practices such as music or art, so at some level it must be necessary, inspiring and interesting. Same for historical research. It’s as well to spend an afternoon looking up salary ranges for some of these pursuits, however, before jumping into an 8-yr PhD program because of the realities of the compensation.

I think you should write a post on why you don’t like index funds. You’ll be the rebel of the pf blogging community with that one!