Seeking to live solely on investment returns is both a big fantasy and a big mistake. Avoid it at all cost.
“This guy retired at 35 with this amazing and safe investment strategy. Want to know how? Click here”
Biggest financial clickbait. I see it regularly, and you probably do too. It usually features a very handsome young man/woman on a yacht, clearly not working for his/her living, and having a load of money anyway.
Beside the obvious scams that those ads are not hiding very well, the underlying message, the biggest investment myth ever, stay strong. This myth can be expressed by this sentence :
“By investing correctly, you can easily earn enough money to stop working, and your life will be wonderful”.
A lot of websites, including some that are not scammers but true believers, advise how to make it, how to get a life where you will never ever have to fake liking your boss or your client again. What a relief !
As you can read this promise is twofold : it promises you that “you can easily earn enough money to stop working” AND it promise you that “your life will be wonderful” if you do.
Both promises are untrue. Do not believe them.
Let’s get into those one by one…
Note : I am of course talking here more specifically to people who have the choice to work, not those, in particular retirees, who might not have the possibility to work, or who rightfully deserve not to anymore.
I am talking here to those who might get lured into believing that investing you own assets can be a safe and sound full time job.
4 reasons why this is an investment behavioral disaster
The first part of the promise is indeed fallacious. You are very very unlikely to make enough money to stop working (except if you already have well enough of course).
In fact it will very probably make you lose money. A lot of it. Here is why :
1 – It will make you extremely short sighted
In order to insure your everyday life, your recurrent spending, you will feel the need to earn constant revenues at least on a monthly basis. So you will seek to earn kind of a stable “revenue” every single month, thus making any kind of long term goals impossible.
Indeed, when you work for your living, your everyday life style is financed by your labor revenues and investment returns provide for long term financial goals. But if you decide to finance those everyday spending with your investment returns you will mentally need to maintain a somehow constant balance between your investment returns and those spending, which is impossible.
Investment returns are unstable by nature, they cannot exist without instability.
And this is catastrophic for your investments. You will start watching them on a weekly or even daily basis, trying to outsmart the market on short horizons, or even focus on trading strategies that are very short term and therefore capable of earning you regular “income”. You will look with appetite toward “opportunities” that guaranty you fast and regular income.
Warning, if you can earn fast, you can lose even faster.
2 – It will make you prone to unrealistic expectations
As you will now set your everyday spending expectations according to your *expected* investment returns and not your job revenues, the former been highly dependent on your investment choices, you will have a huge incentive to overestimate your return expectations.
You will plan your investment returns not on the long term objectives you aim at, the risk you are able and willing to take, or the investment horizon you have, but on the life you are dreaming to live right now.
Let’s be clear on something : it is NOT possible to earn 10% (or 7% or 5%, or even 3%…) with no risk at all, on anything. It is not. If you still believe this put you hands in the air and get away from the computer, please stop all investments right NOW. You are at a huge risk of loss, or worse, scam.
As for now the real short term “risk free” (in fact the lower possible risk) rate is negative (in Euro at least). The 3 month euro lending rate is -0,3%. That is what you can really expect as risk free on a short term basis.
3 – It will make you take huge (hidden) risks
Logically as you returns expectations grow you will start, in order to meet them, to take bigger and bigger risks, risks that you would not take otherwise, but which have a *facial* return and regularity high enough to satisfy your hopes, your wishful thinking.
Those risks might just be market risks like getting involved in a day trading frenzy ( a very good way to lose your money very fast ), or investing in sexy alternative investments like direct foreign real estate, highly leveraged assets, structured products that “hedge you” and have you earn stable income, or more simply annuities products, rare metals… and I am forgetting a lot of them.
I am not saying those strategies are always bad, I am saying that their inherent risk is very high, often tricky to measure, and very often hidden from you, by the salespersons pushing them, or more simply by your own overconfidence in your ability to avoid them : “I know what can happen, and I will move fast enough if it does happen”.
The thing is you will elude some risks as unimportant because you will focus on stable upside and mentally underestimate the financial impact of more subtle risks. You will also strongly underestimate both the probability of your strategy been wrong and the gravity of this error. In short you will gravely underestimate you loss expectations, and you will not prepare adequately.
For instance if you invested in foreign real estate, have you correctly measured: the currency risk (the risk for the underlying currency to fall in comparison to your spending currency), the operational risk ( fire, vacancy, degradations, tenants not paying…) and the foreign risk (incapacity and/or high legal cost to insures due revenues and even property in some case) ? Stable income is not enough.
Bitcoin’s rise & fall was a significant example of this too. The strong attraction power of bitcoin was precisely to make people fantasize about stopping to work. They poured into this gigantic scam, believing those crypto addicts promoting their amazing “hodler” life of Lambos and endless partying. It did not work so well.
4 – It will make you incredibly prone to panic
The problem with the last part, is that those risks are real, not theoretical. You will lose, you will lose a lot, and you will lose before you know it happened.
“Alternative strategies” that promise high and regular returns always meet the same fate : one day, without really knowing why, it crashes, and it crashes hard.
The most recent examples would be crypto currencies of course. But an even more representative example of this would be the wild speculation that occurred two years ago on the volatility of the US equity indexes.
A lot of “I stopped working to focus on this strategy” investors, who were speculating on the continued fall of the S&P500 index volatility, bet massively on this, as it had previously provided the same result for several years: regular, high income with no work.
But on Monday, February the 5th 2018, those “risk free stratgies” met their deadly fate. The said volatility suddenly doubled and the secure “investments” plunged by more than 90%. In one day.
For regular investor, long term ones, there are hard times too, don’t get me wrong, but they usually are more diversified, more long term oriented and there lifestyle is not relying on it. Their life will go on, and their long time projects will be postponed or moderated. Nothing life changing.
But for wannabee full time investors that mentally built their hopes around the belief that nothing could happen, this is a shock, and what should be a very classic and rational “cut you losses dude and move on” decision become a life changing decision : “I have lost so much, if I cut my losses this is over, my dreams are over”.
Getting out of those strategies and mindset requires them to accept that :
- They were very wrong.
- Their fantasy is over. They will have to work.
- They might have to explain their relatives that they lost a lot of money.
You think you want to stop working, but you don’t, you really don’t
This is the second part of the promise. And it is equally wrong. But the reason why is a lot simpler.
You will get bored and you might even feel useless. You don’t want that.
For those of you who still hope to stop working to live off their investments, my modest advise would be to stop. It won’t work and it will definitely won’t make you happier anyway.
You know it, what you really want is not to stop working. What you really want is but to find a meaningful job that motivates and challenges you. And yes sometimes getting that job will mean accepting a lower standard of living. Everything has a price, that’s economics.