Book Review: Just Keep Buying

When it comes to big questions about saving and investing, author Nick Maggiulli is critical of the answers given by the financial industry.  In his book, Just Keep Buying, Maggiulli brings data and evidence to answer these questions in interesting new ways.  I find myself agreeing with most of his conclusions, but not always with how he arrives at them or expresses them.  Whether you agree or disagree with his conclusions, Maggiulli adds to the discussion with thoughtful points of view.

This book is organized around 21 questions that many people ask, including “How much should you save?”, “Should you ever go into debt?”, "Should you rent or should you buy?”, “What should you invest in?”, and “How soon should you invest?”  The discussion and answer to each question is its own chapter.

In the rest of this review, I’ll examine some of these answers.

Save what you can

How much money should you save?  Maggiulli says to “save what you can.”  On its own, this isn’t very helpful.  If you’ve been working for 15 years and have $75 in a savings account along with four maxed-out credit cards, saying “I saved all I could” doesn’t help your situation.  We need to turn to the discussion in this chapter to find better guidance than “save what you can.”

Maggiulli correctly criticizes savings rules like “save 20% of your income,” because “Not only do they ignore fluctuations in income, but they also assume that everyone can save at the same rate, which is empirically false.”

“When we have the ability to save more, we should save more—and when we don’t, we should save less.”  Very true.  My own income fluctuated wildly over my working years.  My annual saving rate ranged from a big negative percentage to over 80%.

Apart from being critical of concrete answers like “save 20% of your income,” the author doesn’t offer much to help readers determine if they’re on a good path with their savings.  To be fair, this is a difficult question to answer generally; it requires insight into likely future income and spending.  Some experts give different saving percentages for each decade of life.  This may be better than a fixed percentage, but it still doesn’t apply well to many people.

Why you need to save less than you think for retirement

Maggiulli points to research showing that retirees don’t spend enough, and that their spending declines in real terms as they age.  I’ve read many such studies, and I always find that their conclusions mostly apply to wealthy retirees.  Their numerical analyses usually implicitly weight retiree outcomes by their income or wealth.  In some cases, the weighting goes by the square of income or wealth.  In such cases, a single retiree with $5 million has more weight in the study than 500 retirees with $200,000 each!

The author quotes results from a study of the Retirement Consumption Gap (RCG), which is the difference between how much people spend and how much experts think they can safely spend.  This study also says

“Results suggest that a consumption gap exists across all asset allocation strategies for those with financial assets at the median level and above.  The RCG for wealthier retirees is large.”

Another study on retirement decumulation referenced in this book includes the following quotes.

“Among the affluent and mass-affluent demographics, many retirees are unnecessarily constraining spending and living well below their means.”

“We acknowledge that these [underspending percentages] are averages, meaning that some people likely save a lot, some spend down assets, and some match spending to income.  These high percentages may be due to some higher-net-worth retirees reinvesting annual required minimum distributions (RMDs) not earmarked for near-term expenses.”

Even Maggiulli’s summary of a third study makes it clear that the conclusions apply to rich people:

“Among mass affluent households (those with $1 million to $2 million in investable wealth), they found … a 15% decline in spending from the younger age group [65-69] to the older [75-79].”

If you expect your retirement savings to be more like US$500,000 or less, you should be wary of experts pointing to research telling you to spend freely early in your retirement.

How to save more

“The biggest lie in personal finance is that you can be rich if you just cut your spending.”

The author isn’t a fan of advice to stop buying lattes.  He thinks the better path is to seek higher income.  In cases I’ve looked at with young people having money problems, the right answer is usually to cut spending and find more income.  This works best if the higher income is long-term so that the spending cuts are only needed in the short-term to alleviate some financial stress.

For older people, options for higher income are usually more limited.  If they’re having financial problems, they usually need to focus on cutting spending.  But there are exceptions.  Every case is different.

The 2x rule

People often feel guilty about spending money on themselves.  Maggiulli offers an interesting way to combat this guilt:

“Anytime I want to splurge on something, I have to take the same amount of money and invest it as well.”

This works best for working people, but for retirees, “you could donate … to a charity to have the same guilt-free effect.”

Why credit card debt isn’t always bad

I could almost hear the howling from financial experts when I read the heading “Why credit card debt isn’t always bad.”  It turns out that what Maggiulli means is that you shouldn’t use up all your available cash to pay off debt.

So, if you’ve got $1000 in your chequing account and you owe more than $1000 on your credit card, it can make sense not to use the whole $1000 to pay down the card.  You don’t know what life will throw at you, and it makes sense to be ready with some cash.

Of course, it would have been best to have done something differently in the past to avoid being in this situation.  But once you’re here, it’s not irrational to hold onto some cash.

Rent or buy a home

The author says that for most of us, it’s best to think that “buying a home isn’t about if, but when.”  I like this framing of home ownership.  Even if renting is better financially, there are many non-financial reasons why people want to own a home.  

“The right time to buy a home is when you can meet the following conditions:

• You plan on being in that location for at least ten years.
• You have a stable personal and professional life.
• You can afford it.”

Saving for big purchases like a downpayment on a home

It can take a long time to build up a downpayment for a home or other amounts for large purchases.  It can seem wasteful to hold these savings in cash while you wait instead of investing them.  Maggiulli digs into historical returns on stocks and bonds to derive the following rule of thumb:

“If you need to save for something that will take less than three years, use cash.  If you are saving for something that will take longer than three years, put your savings in bonds.”

I assume that by “cash” he means saving in a high-interest savings account that produces some interest to help combat inflation.

What should you invest in?

“Use your money to buy income-producing assets.”  The author describes a wide range of income-producing assets beginning with stocks and bonds, but excludes “gold, cryptocurrency, commodities, art, and wine” because they “have no reliable income stream associated with their ownership.”

“Bonds should act as a diversifying asset, not a risk asset.”  I agree.  That’s why I avoid corporate bonds and long-term government bonds.

Why you shouldn’t buy individual stocks

I agree with the conclusion that it doesn’t make sense for the vast majority of investors to own individual stocks.  My reason is that they’re very likely to make less money over the long run than they could have made in index funds.  However, Maggiulli says that “underperforming is the least of your worries.”  He says there is an “existential argument against stock picking.”

Because there is so much randomness in stock returns, most “stock pickers would find it difficult to prove that they are good at stock picking.  This is the existential crisis that I am talking about.  Why would you want to play a game (or make a career) out of something that you can’t prove you are good at?”

Even God couldn’t beat dollar-cost averaging

A common form of market-timing is called “buying the dip.”  This means holding back some cash to wait for your investments to dip in value so that you can buy at a low price.  The main reason not to buy the dip is that prices might just keep rising so that you’ll end up paying more, not less.  However, Maggiulli performs an interesting experiment to try to warn readers away from buying the dip.

He begins by identifying all the all-time highs on a long-term stock chart.  Then he identifies the lowest price between pairs of adjacent all-time highs.  He then compares the results from two strategies: 1) standard dollar-cost averaging (DCA) from a salary, and 2) accumulating cash to buy only at the low points between all-time highs.  Of course, we can’t know when we’ve reached one of these low points; this explains the references to needing God for this strategy.

The seemingly amazing result is that the first strategy, DCA, beats buying the dip with God’s help.  “If God can’t beat dollar-cost averaging, what chance do you have?”

I’m all for finding ways to get people to stop market timing, but I don’t find this analysis compelling.  Although it seems like a great idea to buy at low points, there is a catch.  It certainly makes sense to wait from one market high until the next low point to buy with accumulated cash.  But it makes no sense to accumulate more cash waiting until the low point that follows the next market high.  Sensible people using the second strategy would figure out that they should keep buying stocks from a low point until at least the time when stocks recover to the previous market high point.  There may be rare times when this approach is not best, but it is best the vast majority of the time.  DCA doesn’t really beat God.

All that said, buying the dip only makes sense if you just happen to have some cash lying around.  All research says that deliberately holding back cash is unlikely to work out well for all but the elite investors of the world.

Rebalancing portfolios

Too often I hear people ask what rebalancing strategy gives the greatest profits.  “Most of the time, rebalancing between a higher-growth asset and a lower-growth asset in your portfolio tends to lower overall performance.”  “Why do people still do it?  To reduce risk.”

The point of reducing risk isn’t to make more money in the typical case; it’s to lose less money in a terrible case.  Choosing the right level of risk is about balancing making money in good times against limiting losses in bad times.

Maggiulli prefers periodic rebalancing rather than rebalancing when an asset class price crosses outside a tolerance band.  “I am not a fan of rebalancing based on tolerance bands,” because it “requires more monitoring than a periodic rebalance.”  I agree that monitoring wastes time.  That’s why I have a spreadsheet script that does it automatically.  The rare time I need to rebalance, the script emails me.

Maggiulli doesn’t like frequent rebalancing, because it can trigger taxes in taxable accounts.  I avoid this by mostly trading in tax-advantaged accounts.  This works because I focus on my overall asset allocation (calculated on an after-tax basis) rather than worrying about the asset allocation within each account.

Asset location

“If you want to maximize your after-tax wealth, then you should put your highest-growth assets in tax-sheltered accounts … and your lowest-growth assets in taxable accounts.”

In Canada, I hear the opposite advice too often.  It makes no sense to me to put bonds in RRSPs and stocks in a taxable account.  The main problem is people focusing on before-tax asset allocation rather than after-tax asset allocation.  Another problem is focusing on how much we pay in taxes rather than how much we keep after tax.

Conclusion

This book made me think in new ways about a wide range of important personal finance topics.  Whether or not the reader agrees with the author on every point is less important than the exposure to new ideas.  I recommend this book mainly for readers in the first half of their careers, or who advise younger people.