Updated on 08.23.07

Personal Finance Boils Down To Just Two Things…

Trent Hamm

Once you’ve read up on personal finance, you’ll find that there are a lot of perspectives on almost every issue. What I’ve found is that one should read the advice of others, but don’t subscribe blindly to it. If you read A Random Walk Down Wall Street and then read Jim Cramer’s Real Money, you’re going to be completely unclear as to what the best route to invest is – individual stocks or index funds. The truth? They both have good cases for them and there are situations for each where they’re clearly on top. There is no personal finance guru that is “right” about everything, usually because there is no absolute right.

Take the current stock market. The best thing anyone can do about the direction things are headed is guess. If you believe strongly in “buy and hold” and you hold on right now, this could turn out to be another 1929 and you could still be in the hole thirty years later. Or the housing market could be much better than it seems and August will turn out to be a bump in the road and the people who held on will look like geniuses. Should you sell? Should you hold? Should you buy? There is no absolute right answer, and anyone that says they know for sure is full of it. I certainly don’t know. I can say that my observations on the housing market right now lead me to think that the market is going down from here, but I don’t know that. No one knows that.

So what can a busy person do? The best thing you can do as an individual investor is to read a lot of investing philosophies and ideas and make up your own mind which one is right. That’s why I review personal finance and investing blogs and books in all shades, from Robert Kiyosaki’s speculative real estate investing to Jim Cramer’s individual stock picking to John Bogle’s index funds to Dave Ramsey’s absolute elimination of debt.

What have I found? The only right answer is frugality. Spending less than you make is the only absolute right thing to do. If anyone tells you that there is more that you must do, it’s simply not true. Anyone that tells you to buy or sell any sort of investment is making a guess of some sort – it might be an educated one or it might not.

Want more than just saving money? Learn. Study the material available to you. There are a lot of books out there with different ideas and a lot of blogs out there with different thoughts. I try very hard to tackle as many perspectives as possible on The Simple Dollar, for example, and because of that I sometimes am accused of putting out false information, simply because I’ll write about an unpopular tactic. I don’t really care – to me, the interesting part is learning how to get ahead financially and understanding every choice a person might make.

Do you want to be rich? Spend less than you earn. Learn. Do those two and you will become rich. Everything else can be debated until the sun goes down. Welcome to the conversation.

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  1. Tyler says:

    Well said Trent! JLP lost my respect with that post. JLP: Trent will always be a better writer than you.

  2. Lazy Man says:

    I’m going to add one more step… take action.

    It does little good to learn about investing if you don’t do it. Knowledge does nothing without action on the knowledge.

    The “only right answer of frugality” fits most, but not all people. There are edge cases where people have made enough money that they don’t have to practice frugality to still spend less than they earn. If you’re a CEO of a company making millions a year in stock options and the like, you can be very financial comfortable NOT living by the average definition of frugality.

  3. plonkee says:

    Clearly you haven’t read me. Everyone knows that I am always right.

    Seriously, I agree, although I think that learning is more important.

  4. guinness416 says:

    At some point you have to jump in though. I’m still reading about personal finance (and fitness) constantly, and finding new perspectives. I’ve also been in index funds and gyms for most of my adult life. My current position, peace of mind, and the options I have are much the better for it.

  5. Trent Hamm Trent says:

    My belief is that jumping in is a direct follow-up to learning. The more you learn, the more likely you are to find an investment philosophy that really speaks to you and one that you can feel comfortable and confident with.

  6. j dawg says:

    Well said. Excellent. Taking a position of never reading people you do not agree with is a very weak position. I do not agree with Rich Dad poor Dad. To me there is no such thing as good debt. But I will read his book for that perspective.
    Good article.

  7. Sean says:

    Excellent Post!

  8. doug m says:

    well said, the last paragraph is blunt and to the point, i like that

  9. Wim says:

    Wouldn’t it be better to get into a mutual fund ? It maybe wouldn’t give as much profit as you can do by yourself but it will save a lot of time which can be spend on family or hobbies.

  10. JLP says:

    “If you believe strongly in “buy and hold” and you hold on right now, this could turn out to be another 1929 and you could still be in the hole thirty years later.”


    Where did you come up with that? This has never happened in the past. In fact, there has NEVER been a 20-year down period – even after inflation.


    I never questioned Trent’s writing ability. Rather, I questioned the logic of his post. The best writer in the world will look like a fool if they don’t know what they are writing about.

  11. Minimum Wage says:

    How is one to get ahead financially if they earn minimum wage and have student loan debt? Financial literacy isn’t much use without money.

  12. Matt says:

    I could not have said that better myself. I have read so many investing books and there are so many conflicting points of view out there. The only real way to learn about investing and what works is to read and research and then learn from your successes and failures. And if one method is successful once, that doesn’t always mean it will continue to be successful. You just never know. Excellent Post.

  13. As dramatic and extreme as the 1929 great depression was, unless you had invested all your money at the very top, by holding, you could have regained nearly all your losses in less than 10 years, not 30.

    If you continued to invest more money as others lost their confidence, your gains would have been huge.

  14. Leo says:

    @Minimum Wage: Well, in that case, Trent’s advice would be the most important thing: be frugal.

    The other thing you would do in your case would be to try to get a better job (for more income), which might mean learning new skills. Which is Trent’s other advice: learn.

    Good job, Trent.

    In addition to the two absolutes you mentioned, I would add some pretty sure things: try to increase your income if you can, while still being frugal, and save or invest the difference. How you go about doing those things, of course, is up for debate. :)

  15. Trent Hamm Trent says:

    Look at this chart, JLP. Imagine we’re at 1929 again. Buy and hold would be a disaster.


    If you do even minimum inflation adjustment, the picture is way worse. Without doing the exact math, I would estimate that inflation-adjusted values didn’t recover from 1929 until the 1970s or so. You would have been better off buying savings bonds over that long haul.

    The point here is that you can paint all sorts of different pictures. One needs to do the research, find the philosophy that matches their disposition, and go with that. There is no absolute right and absolute wrong and it’s very arrogant to think so.

  16. Trent Hamm Trent says:

    Also, see this:


    This is the Dow Jones Industrial Average adjusted for inflation over the last 100 years. If you look at this chart, you can easily make a pretty clear cut case how “buy and hold” right now might be pretty dangerous.

    If I wanted to research further, I could very easily find some indications that “buy and hold” is a killer strategy.

    Which one is right? I truly don’t know, but I can tell you one thing: if someone says that they absolutely know, they’re lying to you.

  17. JLP says:

    Check your email. I just sent you some data.

  18. Lazy Man says:

    It might be worth noting that there are more financial safeguards in the market now than there were in the 1929. Here are some examples of why conditions are vastly different from an About.com article.

    I agree with the conclusion the author makes there. No one knows for sure. However, logically these precautions seem to make it far less likely to happen in my opinion. Due to that, I believe that something like 1929 will not happen again.

    Another thing that is not mentioned is that the world is more global than ever before. When all of America was panicking, it was probably less likely that someone from Europe was going to come in with a fresh outlook to be a buyer.

  19. Garret says:

    Nice post. I agree that you can learn a lot from the plethora of investment books out there. Yet from my own perspective, some of the best lessons have come from experience. For stocks, having some money invested, no matter how small, will generally help teach and motivate people to seek more information. Plus, there’s something to be said about the significant cost for delaying your investment in stocks. Someone could miss out on significant returns while hesitating on a particular investment strategy. Along with the buy-and-hold philosophy, starting ASAP is another key idea for stock investments.

    If you were uncomfortable with stock investments, I would suggest starting a index buy-and-hold investing strategy with small amounts that you could bear to lose. As you gain a better understanding, add more money that’s commensurate with your comfort of those investments. I agree that investing in stocks is not for everyone. If you never feel comfortable, you should probably adjust your portfolio to consist of a larger portion of safer, less aggressive investments like bonds (yawn..)and accept the potentially lower returns for the additional peace of mind.

  20. Trent Hamm Trent says:

    For those who are following along at home, JLP sent me a list of annual returns of the S&P 500. That particular index has not seen a negative 20 year period. He also went back and included the S&P 90, a historical precursor to the S&P 500.

    Here’s a glimpse of some of the data, for those interested:

  21. Trent Hamm Trent says:

    Lazy Man, in some ways I agree and others I don’t. For example, hedge funds are like the old 1920s days and operate in the shadows, but own huge pieces of the market.

  22. MossySF says:

    Trent, the difference between your chart numbers and the ones JLP sent you are dividends. Just charting stock/index prices exclude dividends which are HUGE parts of total return. The current environment could be a historic anamoly — current dividend yield is about 2.5% but historically it’s been 4%-7%. Or it could be the wave of the future since capital gains has better tax treatment than dividends so many companies (especially tech) prefer stock buybacks over issuing dividends.

    There’s a nice thread discussing the “no dividends charting” issue at Boggleheads lots of different views of historic data.


    Here’s one of the charts I did showing REAL return in rolling 5,10,15,20,25,30 year periods. There is 1 negative 20 year real return period — 1901-1920 and a few near zero return ones ending 1947 and 1981-1984.


    Some caveats about historic numbers — the S&P500 isn’t the entire market. I just don’t have numbers going back that far for individual asset classes to produce similar charts. The data I do have going back to 1972 show holding different stock asset classes and doing annual rebalancing produce a good 1%-2% higher than just holding the S&P500 or the Total Stock Market.

  23. Trent Hamm Trent says:

    JLP said there has absolutely never been a twenty year down period in the market, even after inflation. Mossy’s links again show this broad statement to be wrong – you can find some that support that view and some that do not.

    All this is doing is proving my broader point, which is to say that there are only two absolute truths in personal finance: save more than you earn and learn.

  24. “Imagine we’re at 1929 again. Buy and hold would be a disaster.”

    Again, the only way this is true is if you had only bought at the very top. Most people invest over time, so their actual losses wouldn’t have been so great.

    The ones that suffered are the ones who panicked and sold while the prices were low.

  25. JLP says:


    By “market” I mean the S&P, not the Dow. I’m pretty sure most people would agree that although not perfect, the S&P 500 is a lot closer gauge of the market than the Dow Jones Industrial Average.

    I stand by my statement.


  26. Liz says:

    I’m not sure there is a good way to say this, but here goes. I love personal finance blogs. I love the simple dollar. And I think Trent has a good point here–living frugally is important, as is trying to learn. The fact is, you can’t look at historical data from the past 80 years and assume that things will always be that way. We have a lot of financial talking heads who base all their advice on what has happened over the past 80 years. If you had put $20 in the stock market in 1912, it would be worth x right now. Who were the idiots that didn’t do that?

    The fact is that during that time there has been an explosive population growth–the world population tripled. We have also utilized a lot of the world’s non-renewable resources, like oil. Both of those trends mean that we are living in a very dynamic period. It was possible to predicate economic theories on the idea of endless economic growth. This is changing. The world population is unlikely to keep growing this fast, and some people think that we have already passed the period of peak oil production. So a lot will change. Energy efficiency will become more important, as will renewable sources of energy.

    Regardless of what the S&P has done for 80 years, you have no guarantee that it will rise faster than savings, etc. for the next 80 years. It may, and it may not. I think diversification merits a mention as important advice. As does common sense.

  27. Trent Hamm Trent says:


    The S&P 500 did not exist during the 1920s to the 1950s. The equivalent you’re using to stand by your statement is the S&P 90, which was so heavily flawed that Standard and Poors ditched it in 1963. That’s an extremely weak basis for such an absolute statement that you made earlier – you’re saying that “the market” during that period is represented by a 90 stock index so flawed that the creators pulled the plug on it shortly after the timeframe in question.

  28. JLP says:


    But you are happy to refer to the “market” as the Dow 30? Other than the S&P 90, there was no broader index at the time.

    Folks, don’t expect Trent to EVER admit he is wrong. He’s an EXPERT on EVERYTHING!

  29. Steven says:

    My two cents: Today, we have more mutal funds and institutional investors than ever before. That is not to say we didn’t have mutual funds seventy five years ago, because we did.

    Mutal funds and institutional investors are a very powerful force when it comes to the market going up or down. Right after 9/11, Fidelity, in an attempt to slow the market plunge, went on a buying spree and bought millions of shares of great companies for pennies on the dollar.

    So did I.

    It took about 4 years to recover from the 9/11 stock market plunge. Those who stuck it out, like myself, are very financially comfortable today.

    It will happen again. And, like Trent says, I learned what works for me.

  30. MossySF says:

    This data mining conversation might be getting a bit too complex for this blog but here are the explanations.

    JLPs graph and mine use the same source data — SP composite index. The big difference is his rolling 20 year starts in 1926 while I have data starting in 1871. The one negative point I have (1901-1920) is before the starting point of JLPs graph. So from JLP’s perspective, he just didn’t have that data point when he made the “no 20-year real loss” statement.

    Whether using SP90+SP500 data is flawed or not — remember that could go either way. An index that tracks a smaller number of larger stocks end up under-reporting the total market performance as small cap stocks historically have performed better due to higher risk premium. You *could* argue that the numbers before 1963 deserve a bump due to the size factor but it would be a random guess what it was.

    This problem also applies to the data you cite Trent. The DJIA only tracks 30 stocks and when it launched in 1896, it only tracked 12 stocks. So the links you posted to DJIA graphs would be considered far more flawed than SP90+SP500 data. Consider that the period of 1901-1920 where my data shows a slight loss and compare to the DJIA graph. Notice how there’s a big spike in 1916 and then it levels off again? Well what happened there was the DJIA increased the number of stocks from 12 to 20 and just did some kooky math to shoehorn it in — the stock market did NOT jump up 85% that year. People only cite the DJIA due to cultural reasons since the general public knows Dow Jones and has ideas of what the numbers mean but nobody in the financial industry actually uses this index.

    So you might say everybody’s wrong but at different degrees. The DJIA price only chart shows an investment made in 1929 would have taken until 1955 before an inflation-adjusted breakeven hit. With reinvested dividends, it actually made it back to breakeven by 1935 and started creeping up again. Until World War 2 caused another collapse pushing out the permanent breakeven to 1943. That’s a difference of 26 years (w/o dividends) versus 15.

    You are correct that nobody can ever say for sure something will happen. But that doesn’t mean we shouldn’t look at what’s likely to happen and put our money on the best option. If I divide up all 20 year periods since 1871, I get the following real return summary:

    -1% to 0% : 0.85%
    0% to 1% : 9.32%
    1% to 2% : 7.63%
    2% to 3% : 5.08%
    3% to 4% : 5.93%
    4% to 5% : 6.78%
    5% to 6% : 18.64%
    6% to 7% : 14.41%
    7% to 8% : 11.02%
    8% to 9% : 6.78%
    9% to 10% : 5.08%
    10% to 11% : 4.24%
    11% to 12% : 3.39%
    12% to 13% : 0.85%

    The chance of losing a tiny bit of money is the same as the chance of increasing your money 10X. When you consider the alternatives (ie, do nothing and guarantee loss due to inflation), it’s not a bad bet to make.

    But I definitely agree with spend less than you make. You can’t invest if you have nothing left over.

  31. The Dow didn’t expand to 30 stocks until 1928, so even that’s not an equal measuring stick across all years, either. In fact, at the outset, it had just 12 stocks.

    Also, failing to incorporate dividend earnings dramatically under-represents true market performance.

  32. Gayle says:

    Regarding 1929 and onward: Lots of people were losing their homes to foreclosure, banks were failing, and jobs were hard to find. Anybody having deja vu here? Sticking it out and holding onto investments was just not an option for most people then. Not having a home or a job makes everything above academic.

    Take care of the basics, frugal, practical living first. While establishing this lifestyle learn everything you can about investing. You will never be able to stop learning, because if you do the market will give you some hard lessons. And finally Just Do Something. That beats Doing Nothing over any time period you can think of.

  33. MossySF beat me to it on the history of the Dow. :)

  34. Ryan says:

    Much as I do like this site, this “controversy” reinforces my view that Trent should leave investment advice to others. Not only is the math extremely “fuzzy” (and thankfully corrected by other comments) but giving Jim Cramer and Malkiel equal weight as investment philosophers for the average investor? C’mon! The average joe with a 401k and an emergency fund has NO business in individual stocks, and there’s about a good chance that Cramer is clinically insane.

    To anyone like Tyler who “lost respect for JLP with that post”: Seriously, he disagreed and called Trent out on what he (and I) thought were errors. And he was pretty respectful about it. Not a big deal. I, for one, have actually learned something through all that.

  35. JLP says:


    Yes, you are correct. My data only went to 1926. I got my data out of the SBBI 2007 Yearbook.


    My statement that the “market” never had a 20-year down period is only true for 1926 – 2006. I didn’t state it that way although my chart clearly shows it is from 1926 – 2006.

  36. Trent Hamm Trent says:

    Note that JLP now puts market in quotes. He’s gone from his original broad statement about the stock market as a whole for all time to discussing only the 90 stocks in the S&P 90 index (and later the S&P 500) over a certain timeframe.

    What’s the point? You can find data to support pretty much any perspective you want, so to flat-out say someone else’s investment philosophy is wrong because it doesn’t mesh with your pet data sets is pretty insulting.

  37. Trent Hamm Trent says:

    I’m not supporting any perspective in this discussion about stock market history, merely saying that there is data that supports both sides, and JLP’s absolute statement above is not only wrong, but that the investment philosophy he uses that is based on that statement is also debatable.

    The point of this post is that nothing is set in stone, and JLP is basically proving my point for me. Thank you.

  38. bubba says:

    Anybody can come up with data to support their pre-determined cause.

    That $10K of stock I purchased in Pets.com back in 2000 is worthless now. Therefore, Trent is right and buy&hold is stupid. QED.

  39. Trent Hamm Trent says:

    “Folks, don’t expect Trent to EVER admit he is wrong. He’s an EXPERT on EVERYTHING!”

    What assertation in this post are you wanting me to admit wrongness on?

  40. JLP says:


    I’m through with you. I have wasted too much time with you and your silly ideas. You say you want to debate but that is far from the truth. Rather than debate, you want to nitpick my statements to find small inaccuracies and focus on that instead of the big picture.

    I think you should stick to blogging about crockpots, bananas, and other less-challenging topics because your investing advice stinks.


  41. MossySF says:

    I re-read the original posting and I see Trent stated 30 years. If I split up SP data into 30 year periods, I get:

    2%-3% : 0.93%
    3%-4% : 2.79%
    4%-5% : 19.44%
    5%-6% : 19.44%
    6%-7% : 14.81%
    7%-8% : 15.74%
    8%-9% : 18.52%
    9%-10% : 7.41%
    10%-11% : 0.93%

    Pretty even distribution from 4% to 9%. 90% of 30-year periods are in that range.

  42. eR0CK says:

    Jeez, this is good. I think people should study the debate here and make a judgment on their own.

    Personally, I’m 24 and I have 40+ years to retirement, despite the nervousness of some, my 401K is still up 8%+ for the year and we’re not even over yet!

    My point is, if you have 40+ years until retirement, these market corrections are not something to get worked-up about in most circumstances.

    I disagree with pulling out your money if you’re uncomfortable, rather you should discover why you’re uncomfortable and find books that discuss these factors so you have a better understanding and then re-evaluate your portfolio.

    For beginners, check out Bogleheads guide to investing.

  43. eR0CK says:


    I’m pretty sure this all started when talking about a 401k … what 401k invests solely in individual stocks?

    If your risk tolerance is too low, put your money in a low interest baring savings account so you don’t worry, but just accept you’ll be forgoing future gains to mitigate your low risk tolerance.

    Buy and hold has worked over and over again. Checkout a Peter Lynch book sometime.

    JLP is on the money. Individual stocks are a different animal, hence why we’re discussing the S&P500, your pets.com comment is irrelevant to this discussion and proves nothing.

  44. bubba says:


    Erm… My sarcasm didn’t catch, I suppose. Here, I’ll try it again.

    Trent is correct. One should never invest when one feels uncomfortable, and should only reinvest when one feels the warm fuzzies. I was never warmier nor fuzzier than when the Dow hit 14000. I’m extremely uncomfortable now. So I just pulled all my 401(k) assets out of stocks and put them into collectibles (you know, beanie babies and the like). I will only put that money back into stocks when I feel good about it again… say, when the Dow hits 14000 again.

    Thanks Trent! You ratcheted up my base fears to the point where I panicked and did something rash. Thanks goodness /someone/ is looking out for us ig’nant folk.

    (Hint: I think Trent’s original advice to Lila was dangerous and irresponsible. He reminds me of my middle class friends who vote Republican — I stare at them and stare and them and I just can’t see what it is that causes them to vote against their own interests).


  45. eR0CK says:

    @ bubba

    Thanks Bubz, it’s clear now, buddy!

    The way I look at it, if you had $10K invested and the DOW hit 14,000 and you pull out when it hits 13,000 … when do you jump back in? When it’s 14,000 again? That’s a double loss in my eyes since you’ll be getting fewer stocks.

    I’m Libertarian :-)

    I think Trent should have outlined some considerations and not made such a bold statement such as pull out into cash or the like.

    Thanks for the sarcasm clarification!

  46. Trent Hamm Trent says:

    The conclusion here is correct. Market timing has significantly higher risk than buy and hold in exchange for potentially significantly higher return. It merely means that that investment strategy exceeds your risk tolerance and also your willingness to do the needed study and research to make it a success.

    I am, however, really disappointed that JLP hijacked this thread to deal with his own issues, insults me, then refuses to even answer a very basic questions.

  47. eROCK says:


    I understand you did make some fine recommendations, but initially you did not, that’s what I meant. I apologize about any confusion.

    As for JLP, he’s just a regular commenter just like everyone else, but he just so happens to have a popular blog, I think it’s fine.

    As for he not answering your question’s and you not answering his, why not take this opportunity to use this debate to inform others. Both of you can cool off a bit and maybe make a series of posts between the two blogs to outline all the considerations needed to made such important decisions? Maybe different strategies, platforms, strategies, etc? I’m sure Buffet, Lynch, O’Neil, Cramer, and others don’t share the same thought process, but imagine if they got in a room together for a formal, but civil and informational debate? How cool would that be? It would be like a brain picking fest, I’d love it.

    What’s so great is that both of you have very different points of view and many of your readers subscribe to different points of view all the time. You know, sometimes I agree with you, other times I disagree and the same things occur when I read JLP’s blog. It’s not because I like JLP or you more, it’s just that my opinions, risk tolerance, education, and other factors influence my decision and I think your readers and JLP’s are just the same.

    Please take time and consider coming together with JLP (or visa-versa) to offer some sort of series of posts between the both of you … you’re both great bloggers and offer great perspectives … rather than debate numbers and indexes in the comment section of one another’s blog, lets see some great stuff in terms of bipartisan posts! That would be great!


  48. Duggle says:

    Well you “I know best” types sure do like to rain on other peoples ideas. All I have is this question to ALL of you who keep trying to bandy around your investment knowledge; Are you billionaires yet? No? How about multi-millionaires? No again?

    Trent’s overall statement of “anyone who says they know for sure is lying” is completely true. At best you can make an educated guess, but if anyone truly really “knew” they would be billionaires already. The only person who comes to mind that really “knows” is Warren Buffet. The rest of you just try to play catch up.

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