Historical article note: This article was originally published on 2019-08-30. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
Many people say that they started their investment careers too late, and wish they had known this financial literacy knowledge earlier. What does this mean? 1. If you start investing earlier, you can meet a better version of yourself; 2. If it’s already like this, accept your fate; 3. If you didn’t learn how to invest and manage money because of your parents, then you can only hope for the next generation. Successful investing doesn’t require a degree, a high IQ, or even a lot of capital. What it requires is realizing as early as possible that financial skills are the highest return-on-investment skills and taking immediate action. Therefore, the key to success in investing and financial management lies in time and meeting the right people. It would be great to have a financial investment curriculum, so even if you miss something, you know which class to catch up on. I tried to make a curriculum for reference for readers.
01 Establish intangible assets during adolescence
When college undergraduates enter society, they are around 22 years old. At this stage, what needs to be understood is the correct economics. If you haven’t read the economic works of Hayek, Mises, or Rothbard, you should at least read "Xue Zhaofeng’s Lectures on Economics" or Zhang Wuchang’s "Economic Explanation," because these economists' works contain content on private property economics. Other books with macroeconomic content are not very useful for personal investing and financial management.
After graduating from university, it is the period when young people begin to think about life and try to align themselves with society. Their focus is on intangible assets such as education, knowledge, skills, friendships, interpersonal relationships, job positions, and personal emotions. In today's rapidly developing society, this period of trial and alignment takes a long time. Compared to those of us born in the 1970s, finding a job and staying in the same position for ten years was much simpler; now young people need multiple adjustments and attempts to find a relatively suitable fit. In earlier times, our parents were all assigned to a certain unit to work for their entire lives after graduation. Although they did not need to feel confused upon graduating, their lives were also rather dull. Young people just entering society cannot yet consider building tangible assets. During this period, they should have a basic understanding of economics: the first principle of economics is scarcity—job positions are scarce, high-income positions are even scarcer, friendships are precious, and friendships in adversity are even harder to come by. The second principle is substitutability—income is entirely related to how replaceable one is. Even if A is very scarce, over time, a substitute B for A will eventually be found. These are basic economic principles that can be personally felt. These important and fundamental economic principles are crucial for future investment and financial wisdom.
During adolescence, most people are busy thinking and imagining their future. Very few teenagers actually take action toward building a wealthy life: Rockefeller became an apprentice at 16 and started his own company at 21; Andrew Carnegie started working at 17; Buffett began buying stocks at 11; Bill Gates dropped out of college to start a business. Super billionaires are not necessarily more intelligent than others, but they take more action and start earlier than most people—that is an ironclad fact. The amount of tangible assets one can accumulate in a lifetime depends on how much action one takes, not how much one daydreams.
02 Consider debt and tangible assets when starting a family
The biggest setback today's young people may face is the mother-in-law's demand: no house, no marriage registration. Building a family is like running a business partnership; both parties invest. The woman primarily invests her youth, while the man invests money. During the marriage, in the early years, the woman has to have children, may have to put work on hold, and sacrifices youth, investing more than the man. Therefore, the man has to adopt the attitude of running a century-old partnership, first putting in the savings of three generations to buy a house and adding the woman's name to show his determination; otherwise, the business (family) won't get started. Many young people complain that housing hijacks love, but a few years ago, those sons-in-law who used the combined efforts of three generations to meet the mother-in-law's demands, which one did not thank her pressure? Otherwise, they might never have been able to afford a house in their lifetime.
The young people whose fathers and grandfathers have no savings are the worst off; they can only grow up quickly as poor children and start learning about investment and financial management once they earn their own income after entering society. The first step is saving, only buying what is necessary in daily expenses, not what you want, otherwise you can't save money. The second step is investing, putting money into Yu'ebao, money market funds, and other investment products with a return rate of about 4% and good liquidity. The third step is paying full social security and taxes to prepare for buying a house with a mortgage in the future.
When saving money to buy a house, you should not only avoid impulsive spending but also refrain from taking out consumer loans. The interest rates on consumer loans are usually higher than the inflation rate. Borrowing money to spend tomorrow comes at a high cost and can erode your existing savings. During this period, the most important thing is to distinguish between what is an asset and what is a liability. Only what can generate income is an asset; what consumes income is a liability. A self-occupied house, especially one with a mortgage, consumes a large amount of income and is considered a liability, not an asset. Stocks, bonds, investment properties, and other income-generating assets are true assets. People who do not understand this concept may be at a disadvantage for a lifetime.
03 Consider insurance after having debt
After getting married and taking out a mortgage to buy a house, the responsibilities increase. If one spouse encounters an accident, the other will bear significant financial pressure. This pressure is usually too great for a family, so it is necessary to diversify the risk through insurance. There are two principles for insurance: First, regardless of anyone's health condition, if economic capability only allows for insurance on one person, insure the higher-income person, and the beneficiary should be the lower-income person; second, the insurance amount should match the level of debt, and every time debt increases, insurance should be increased as well. It is recommended that, when financial resources are limited, insurance and investment should be separate, because insurance with financial management features is a bit expensive. The earlier this is done, the better. Many Chinese families are too deeply in debt and have a high risk exposure in this regard. The principle of buying insurance is very simple: we never know whether tomorrow or an accident will come first. The probability of an accident occurring in the population is not high, but once it happens, it is a 100% disaster for a family. We cannot prevent disasters or accidents from happening, but we can prepare in advance to provide relief in case they occur. Important but not urgent matters should be done early, no doubt about it.
04 Introduction to Financial Asset Investment
Investing in financial assets is a lifelong matter; the earlier you start, the better. However, when you are young, priorities like getting married and buying a house are too high, so many people only think about financial asset investment without taking any actual action. Investing in financial assets does not happen automatically just because you have money, nor should you rush in based on hearsay about which stock to buy. The fundamental concept of financial asset investment is the most important.
Compound interest is a tool for financial asset investment, and only stable and long-term investment returns can allow compound interest to work. Value investing is a recognized treasure in stock investment; only stocks whose price-to-earnings ratio, price-to-book ratio, return on net assets, and dividend yield meet investment requirements can be held long-term. Macro-economic investment requires Soros-style reflexive thinking, the ability to move against the tide, and to profit from the mistakes of others.
For ordinary people, trying to beat the market is basically a fantasy because institutional investors won't leave any arbitrage opportunities for retail investors. According to the life cycle approach, constructing an investment portfolio through index funds and adjusting the portfolio proportions once a year is the best strategy for the financial asset investment of regular households. The life cycle means that the proportion of bonds and money market funds is proportional to age: at 30 years old, the ratio of bonds and money market funds is 30%, and stocks are 70%; at 70 years old, the ratio of bonds and money market funds is 70%, and stocks are 30%. An index does not get delisted, unlike certain stocks whose market value can drop to zero and get delisted, causing a total loss of investment. Therefore, an index can be held long-term without worrying about the risk of disappearing. Frequent trading increases transaction costs, so don’t keep fiddling; adjusting once a year is enough, otherwise the meager profits won't even cover the fees.
Investing regularly in index funds is considered the best way to diversify risk and for non-professional investors to engage in long-term investing, winning the game of losers. By investing 5,000 yuan each month, you buy fewer shares when the index is high and more shares when the index is low, effectively averaging the cost. Persisting over a long period can produce the regular investment smile effect. In the capital market, professional investment institutions are considered professional players, while non-professional investors are considered amateur players. When amateur players compete with professional players, it is a game of losers, but amateurs can win this game by being good at defense and waiting for the professionals to make mistakes.
The above are all the most basic principles of financial asset investment. I lack experience in financial asset investment; the above suggestions are what I have summarized after reading more than 15 finance and wealth management books. After reading these books, my conclusion is that real estate investment is still simpler.
05 Introduction to Real Estate Investment
Financial advisors constantly remind their clients not to put all their eggs in one basket. In fact, what these advisors can do is only to place a few small baskets of different financial products into a big basket of financial assets. If real estate investment is not included in the investment portfolio, then the portfolio is incomplete and seriously lacking. Human wealth has gradually accumulated in real estate, forming a huge stock of wealth. As is well known, it is very difficult to redistribute stock wealth. Many immigrants in Canada eventually returned to China; although the surface reasons vary, being unable to get a share of the stock wealth in Canada is one of the important reasons.
In real estate wealth, 90% is existing wealth, and competing for existing wealth is even harder than creating wealth. The existing stock of real estate is the secondary housing market, and investors' performance in the secondary housing market is their performance in the battle for existing wealth.
There are many restrictions on real estate investment, and the threshold is relatively high. The restrictions on real estate investment can be summarized as follows: 1. Only real estate in first-tier cities has stable and lasting appreciation potential: In China, after making money, people from Wenzhou invest in real estate in Shanghai because they know that only first-tier properties have the strongest appreciation potential; the bosses from the wool sweater producing areas, after making money by selling resources, built luxury houses locally and bought them themselves, but ended up creating a ghost city. 2. The required amount of investment is relatively high: The down payment for real estate investment is at least a six-figure amount, which is not as easy as trading stocks. 3. High income requirements: Without income, one cannot obtain a loan. The tool for financial investment is compound interest, while the tool for real estate investment is leverage. Without loan support, investing in real estate is impossible. 4. Ability to hold long-term: Genghis Khan was the largest landowner in history, conquering over 10 million square kilometers of land. Land cannot be moved, and holding land long-term requires maintaining ownership over time. Genghis Khan’s descendants failed to maintain it, leading to the failure of the land investment.
The real estate investment we are talking about today refers to urban real estate investment, which is very different from the era of Genghis Khan. The characteristics of urban real estate can be summed up in eight characters: people gather, money gathers; the expensive survive. A mayor in Detroit was re-elected for 20 years, during which the white population fled. Although he carried out extensive municipal projects, the result was that every building was eerily empty. Cities without wealthy people are all ghost towns. Chinese university professors tell graduates to seek jobs in cities with the highest rents. The higher the rent, the higher the property prices, the more opportunities the city has, and the more opportunities you have, the higher your income, so rent and property prices can continue to rise. People who don't understand this principle, looking for cities with cash flow to invest in real estate all over the world, are completely putting the cart before the horse.
Real estate investors are in an awkward position, unable to show wealth, and are heavily in debt, but the day they turn things around, they surpass stock investors by miles. Residents in first-tier cities have a unique advantage in real estate investment; not investing in real estate is the biggest waste of resources. Chinese immigrants in Canada arriving as the first generation should, once their work and income stabilize, directly aim for Canada’s second-hand property market with the largest wealth stock. Although it is difficult, the rewards are huge. Among Chinese who are successful in real estate investment, no one goes back.
06 Intangible Assets Determine Life Satisfaction
In Canada, the ideal post-retirement life is: the couple has mutual $1 million life insurance, the mortgage on their own home is fully paid off, and at least $2 million in financial assets. These are only material guarantees. The completeness and happiness of life ultimately depend on intangible assets: reputation, friends, family, health, contentment, hobbies. Elderly people with no life pressures even start a second journey of self-discovery. A 70-year-old goes to the Arctic to take photos, a 75-year-old starts cultivating orange trees; these have many similarities with the journey of self-discovery in adolescence.
07 Reference Books for Financial Management Courses
One day I saw someone in my WeChat moments taking a selfie at a ticketed financial management course. When I zoomed in with my fingers, I couldn't help but laugh. The lecture he participated in was actually a promotional event where sales representatives were pushing a certain fund. For people with no concept of investment and financial management to be misled to this extent is really a unique scene in our Chinese community.
Investing and financial management are personal matters, and it is a process of self-learning. The most crucial thing when starting out is to choose the right books. With a curriculum in hand, if you want to study systematically, you can also read the following books:
Mainland Chinese readers prefer Shuimei Wuyu's 'Independence Begins with Wealth.' The author is a successful investor and a woman. The content of the book is clear and thorough, without a single word of nonsense, all practical information, and I fully agree with and admire her views. The books recommended by the author in this book have a very high overlap with the books I have read.
The basics of economics have already been mentioned above. Just pick any two books to read, and that will be enough.
For stock investing, I recommend 'A Random Walk Down Wall Street.' If you're too busy to read the whole book, start directly from chapter ten to the end. 'The Most Important Thing Investing' and 'Winning the Loser's Game' are also very helpful; the books are thin, so you should read them all.
Real estate investment, there are few books, I recommend 'Rich Dad's Guide to Real Estate Investing'
For intangible asset investment, choose the complete set of 'The Road Less Traveled', see if you have any psychological issues, and at the same time warm up those who are truly mentally ill.
All those who despise the difficulty of investing will eventually taste the bitterness of investment failure. Investing is a lifelong pursuit, but the earlier you start, the better. Success depends on how much you take action; if you wait until you're older to act, once you fail, your lifetime savings will be gone. I wish all readers a world abundant in both tangible and intangible assets. If you have friends and family you care about, share this course schedule with them as well, motivate each other, and start taking action as soon as possible.