If you're new here, this blog will give you the tools to become financially independent in 5 years on a median salary. The wiki page gives a good summary of the principles of the strategy. The key to success is to run your personal finances much like a business, thinking about assets and inventory and focusing on efficiency and value for money. Not just any business but a business that's flexible, agile, and adaptable. Conversely most consumers run their personal finances like an inflexible money-losing anti-business always in danger of losing their jobs.
Here's almost a thousand online journals from people, who are following the ERE strategy tailored to their particular situation (age, children, location, education, goals, ...). Increasing their savings from the usual 5-15% of their income to tens of thousands of dollars each year or typically 40-80% of their income, many accumulate six-figure net-worths within a few years.
Since everybody's situation is different (age, education, location, children, goals, ...) I suggest only spending a brief moment on this blog, which can be thought of as my personal journal, before looking for the crowd's wisdom for your particular situation in the forum journals.
If you enjoy the blog, also consider the book which is much better organized and more complete. You can read the first chapter for free, listen to the preamble, or see the reviews (1,2,3,4,5,6,7,8,9, A,B,C,D,E,F,G,H,I,J,K,L,M,N,O,P,Q,R,S,T,U,V,W,Z). Subscribe to the blog via email or RSS. Get updates on the facebook page, join the forums, and look for tactics on the ERE wiki. Here's a list of all the ERE blog posts.
A lot of the disagreement comes about because there are different players in the stock market.
1) Traders who seek capital gains on their shares.
2) Investors who seek return on their money from businesses.
3) Owners who seek control over companies.
The market is a combination of these types. The efficient market theory is the idea that the second group determines all the prices.
(This is not always true. For example, during periods of euphoria, the market is clearly dominated by traders.)
Diversification is the idea that since it is impossible to determine which student in the class will get the highest grades, or which athlete will run faster, or which analyst better understands a business of the economy, it’s better to bet on the average.
Nondiversification/concentration is the idea that students who outperform have certain observable characteristics in common.
Asset allocation is diversification expanded to include more classes. Since asset allocation is becoming more popular, asset classes have started moving together just like most stocks in indexes now move together.
This market efficiency actually makes business inefficient.
Any strategy or edge (alpha) will eventually negate itself and turn into pure volatility (beta) as it becomes more widely applied. This means that to outperform you need either better vision (ideas) or better execution (don’t do stupid things) than average.
There’s probably a lot of money to be made on the failures of human psychology as long as you don’t have as many of those yourself.
Originally posted 2010-10-08 15:38:00.
