WHAT DOES IT TAKE to succeed financially? Here’s my list of the 10 most important choices you’ll ever make:
1. How much you borrow for college. Planning to become a journalist or a social worker? The lower your likely lifetime earnings, the less sense it makes to take on a heap of education loans.
2. What career you pursue. Obviously, the more you earn, the easier things should be financially—though this advantage is often frittered away through excessive spending.
3. How early in life you start saving—and how much you save each month.
4. How big a house you buy relative to your income. One way to waste a handsome salary: Purchase a home you can barely afford, leaving you starved of cash for other goals.
5. Whether you marry the right person. A quick way to lose half your wealth: Get divorced. The slower route: Marry someone with bad financial habits.
6. How often you replace your car. For the typical American family, cars are a huge financial drain, second only to housing. Is your sense of self-worth riding on the fanciness of your car, the size of your home and other possessions? You’re sunk.
7. Whether you make a lifetime commitment to stocks. Every year, there’s another terrifying reason to abandon the stock market. But if you look back at the market’s performance over your lifetime, you’ll likely wonder why anybody would invest in anything else.
8. Whether you have children. They’re more fun than guinea pigs, but a tad more expensive.
9. Whether you waste time and money on the foolish pursuit of market-beating gains. The reality: Your chances of beating the market over a lifetime of investing are so small as to be hardly worth considering.
10. When you claim Social Security. Remember, the big financial risk isn’t dying early in retirement. Rather, the big risk is living longer than you ever imagined—which is why most folks should delay Social Security until at least age 66 and perhaps age 70, so they receive a larger monthly check.
As you might have noticed, pure investment decisions don’t figure prominently on my list. One implication: If you’re grappling with the 10 decisions above, you will likely receive a fair amount of help from a good financial planner—but very little help from the typical stockbroker.
THE CLEMENTS HOUSEHOLD has been in turmoil since May. After weeks of shoehorning our life’s possessions into endless cardboard boxes, we moved home and then, three days later, headed off for 10 days of vacation. My wife and I aren’t quite sure how we settled on this crazy schedule (though we’re pretty sure the other spouse is responsible). But we’re painfully aware of the result: It’s been months since we’ve had anything that felt like an ordinary day.
That might sound fun, but it has a big downside. When you’re in a routine, it’s much easier to spend thoughtfully, eat right, exercise regularly and handle the day’s tasks efficiently.
As someone once told me, “The routine is liberating.” At home, you quickly make the morning coffee, shower, dress and get on with the day. When you’re staying with friends, you hunt through their kitchen for the coffee filters, puzzle over how the shower works and crawl through your suitcase for the shirt you never packed.
On vacation, you also end up spending far more than usual—and in ways you never would at home. You eat out meal after meal. You blithely pony up huge sums for guided tours, museums and amusement parks. You buy worthless trinkets at ridiculous prices—knowing you’re overpaying, but feeling they are worth the price because of the memories that accompany them.
Moving brings the same out-of-control spending. You’ll often need to carry two residences for at least a short while. You’ll toss out stuff that seems too old or too troublesome to move, only to buy replacements for your new home. And when you’re packing and moving, who has time to cook? That’s more meals out—and, for those of us lacking in discipline, more dubious food choices.
Make no mistake: Staying put is a lot cheaper than moving around. For 20 years, I lived in the same, easily affordable house in New Jersey. Looking back, I realize that was crucial to my portfolio’s growth, because it allowed me to save gobs of money. Now that we’re settled in our new home, my hope is that the only way I’ll leave is feet first—but preferably not too soon.
WHAT EXPLAINS AMERICA’S MISERABLY low savings rate? There’s no shortage of suspects. You could finger our lack of self-control, as well as our tendency to favor today’s spending and shortchange tomorrow’s goals. You can cite seven decades of post-war prosperity, which has made Americans confident they can weather financial storms, despite skimpy savings and hefty debts. You could blame rising aspirations amid increasing income inequality, which have left low-income families spending ever more as they seek to keep up with the Joneses.
To that list, here’s another potential culprit: We aren’t very good at figuring out what will make us happy. My 11-year-old stepdaughter is a regular reminder of this unfortunate fact: One day, she’s desperate to buy a particular piece of clothing or pair of shoes, confident that it’s the answer to all her fashion prayers—and the next day she’s on to something else. I can recall suffering from the same spending compulsion when I was a kid and, to a lesser degree, even in my 20s and 30s.
The good news: Our belief that happiness can be bought at the shopping mall seems to fade as we grow older. If we’re playing economist, we might argue that this is rational: The older we are, the less time we have to enjoy our new purchases, so it makes sense that possessions lose their luster.
But I’d argue it’s less to do with a rational economic thinking and more to do with wisdom acquired through repeated disappointment. By the time we reach our 40s and 50s, we’ve had many decades of eager spending and subsequent dissatisfaction—and the lesson has finally been hammered home. Instead, when we spend, we’re less focused on possessions and more on experiences—travel, concerts, dinner out with friends—which research suggests are far more likely to boost our happiness.
I PROMISE TO BEHAVE better tomorrow. What happens when tomorrow becomes today? All bets are off.
Our broken promises might involve money, such as committing to spend less, save more and pay down debt. Or they might involve some other aspect of our life, such as committing to eat healthier, exercise more and drink less.
All this highlights our irrationality. We may not be experts in nutrition, physical education and money management. But we have a pretty good idea of how we ought to behave. The challenge: getting ourselves to do it. When the moment arrives, our resolve falters and, soon enough, we’re ordering French fries.
How can we get ourselves to stick to our promises? Try four strategies:
- Make it public. If you announce to friends and family that, within the next 12 months, you plan to save enough to make a house down payment, it’ll be that much harder to let the matter slide.
- Reveal all. Ask a friend whether you can discuss your financial situation with him or her, including sharing your account statements. Knowing that somebody else will be looking at your finances will likely spur you to clean up your act.
- Remove temptation. This evening, if you don’t want to have a drink or eat dessert, it’ll be a whole lot easier to show some backbone if you have neither booze nor ice cream in the house. Similarly, if you want to limit how much you spend at the mall this weekend, leave the credit cards at home—and instead bring cash equal to your shopping budget.
- Commit today for tomorrow. This is the reason I love 401(k) plans and automatic mutual-fund investment plans. You agree today to invest on a regular basis. Once that commitment is made, it quickly becomes a good habit that you’re unlikely to abandon, if only because of inertia.
WALL STREET’S INHABITANTS have many unpleasant qualities: greed, arrogance, disdain for customers, inflated self-importance, a sense of entitlement. But all this is made worse by another unappealing trait: They’re so damn prickly.
The degree of prickliness is closely correlated with the outrageousness of the fees they charge. I saw this again and again during my decades as a financial journalist. I can’t recall an index-fund manager ever throwing a king-size snit, and it was rare that I got a nasty letter or email from a fee-only financial planner.
Instead, this sort of behavior seems to be the preserve of those who make a living stuffing high-cost dreck down the throats of everyday Americans. Exhibit A: sellers of variable and equity-indexed annuities. Say something nasty about these products and your inbox will likely be filled with vicious messages. Annuity salesmen appear to be emboldened—rather than embarrassed—by the huge commissions they collect, and view themselves as misunderstood victims of an unappreciative world. Sort of like teenagers.
Next on the snit list are sellers of cash-value life insurance, another group collecting commissions that would make even used car salesmen blush. Arguing with these folks is an exercise in frustration. Mention the high commissions and you’ll be told about the dividends. Pick holes in the need for lifetime insurance coverage and you’ll hear about the loan feature. Discuss the high lapse rate and you’ll be told about the tax-free death benefit. And so it goes on.
A little further down the snit list are stockbrokers who sell load mutual funds that can charge an initial sales commission of as much as 5.75%. In the late 1980s and early 1990s, I remember hearing all kinds of drivel from these folks—about how load funds outperform no-load funds (not true), how the commission creates an incentive for the fund’s manager to work harder (not true), how index funds are guaranteed mediocrity (not true).
Today, you’re less likely to hear this nonsense, in part because many stockbrokers are trying to kick the commission habit. Instead, they’re focused on getting clients to open fee-based advisory accounts that (irony alert) hold no-load mutual funds and exchange-traded index funds.
INVESTORS ARE HUMANS, TOO. In the rest of our life, we readily acknowledge that emotions play a huge role. But when handling money, we insist we’re entirely rational. Really? Here are 10 headscratchers that suggest otherwise:
- Why do we concede that the car sitting out in the rain is a depreciating asset, and yet we’re convinced that the house sitting in the rain is a great investment?
- Why do people, who are so optimistic about everything else, rush to claim Social Security at age 62, suggesting they’re pessimistic about their own life expectancy?
- Why do we go out of our way to collect tax deductions, when these tax deductions might save us just 25 cents for every $1 we spend?
- Why will people readily admit that their family life is in turmoil, and yet they’d never admit that their finances are a disaster?
- Why do we buy the extended warranty in case the $300 television breaks, but we fail to buy disability, health and life insurance in case our body breaks?
- Why do folks, who would never dream of going into debt to buy stocks, think it’s entirely prudent to borrow 95% of the purchase price when they buy a house?
- Why do we build diversified portfolios—and then get surprised when all of our investments don’t go up at the same time?
- Why do folks flock to exchange-traded index funds for their low costs and enviable tax efficiency, and then throw away both advantages by rapidly trading their funds?
- Why do we spend hours researching which $100 hotel room to book, and yet we’ll invest tens of thousands of dollars based on a five-minute cold call from a broker?
- Why do we concede that we’d have no chance against a professional tennis player, and yet we imagine we can beat the market averages, even as most professional money managers fail?
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WHEN I WAS AT CAMBRIDGE UNIVERSITY in the early 1980s, there was a popular joke, “What’s left of Cambridge economics? The answer: Absolutely nothing—there’s nothing to the left of Cambridge economics.” At a time when monetarism and supply side economics were on the rise in the U.S., Cambridge economics professors seemed more interested in exploring how to make Karl Marx relevant to the modern world. It was a quixotic quest—and seemed even more quixotic after the Berlin Wall’s collapse conclusively proved that Marx in practice wasn’t terribly popular.
Yet it occurs to me that Marx, if he were alive today, might try to claim some belated vindication. Think about what’s happened since the early 1980s. As business competition has gone global, we’ve seen increasing income inequality. Globalization has fostered economic growth and forced businesses to be more efficient, helping the standard of living of many. But not everybody has benefited. Those who have suffered economically seem to have found their voice with Donald Trump, Bernie Sanders, Brexit, Austria’s Freedom Party and France’s Front National.
I suspect all this will prove to be a momentary hiccup—and, a few years from now, the free movement of people and trade will once again be widely accepted as good for the global economy. But I think there’s a lesson for politicians on both the left and right: Globalization creates economic losers—and, if you want to enjoy the upside of globalization, you need also to address the downside.
MONEY ISN’T AN END in itself. Rather, it’s a means to other ends. But what ends? Some people have a good handle on what they want from their financial life. But for others, it’s a lifelong struggle. They purchase endless possessions that bring only fleeting pleasure. They pursue goals that they belatedly discover aren’t all that important to them. Result: money worries, excessive spending, mountains of debt and fierce family arguments.
How can we avoid this mess? In his new book The Feel Rich Project, financial planner Michael F. Kay advises readers to figure out what their “musts” are—as he puts it, “what must occur for you to feel secure, satisfied, and successful.” These aren’t the things that would be nice to have or nice to do, or the things we feel we should have or should do. Rather, the “musts” are things that are essential either for our sense of security or because they speak to our core values.
Everybody will have a different list of “musts.” Here’s what makes my list:
- I don’t want to worry about money, and I don’t want my spouse to worry. Having enough savings obviously helps. But I also limit my purchases to things I really care about. Spending less, so I worry less, seems like a small price to pay.
- I don’t provide regular financial support to my adult children, and I don’t think that would be healthy. Still, I want to make their lives a little easier and I love to bring our family together for special occasions, so I’m quick to send a check when they’re hit with a surprisingly expensive car repair and I’m happy to pay for them to join us on vacation.
- I want to devote my days to activities I love. I have a ridiculous number of projects on my plate, but they’re all of my choosing—blogging, writing books, working on a financial startup, putting out my bimonthly newsletter, sitting on the board of a financial advisory firm. Some of these things are lucrative, some may eventually prove lucrative—and some make minimum wage look like an attractive proposition. But whatever the pay, I want to keep doing them, and I don’t want any misstep with my finances to imperil that.
TODAY’S FINANCIAL ADVICE: JUST SAY NO. You can probably think of instances when an individual ought to ignore one or two of the suggestions below. Still, I’d argue that—if most folks followed these rules—they’d be far better off financially. Want a brighter financial future? Here are 51 things you shouldn’t do:
- Don’t buy cash-value life insurance.
- Don’t envy hedge fund investors.
- Don’t write frequent checks against bond funds held in a taxable account.
- Don’t carry a credit card balance.
- Don’t invest in high-turnover stock funds.
- Don’t fund custodial accounts if your family hopes to receive college financial aid.
- Don’t trust brokers when their lips are moving.
- Don’t keep a heap of money in your checking account.
- Don’t assume the premium on your long-term-care insurance is fixed for life.
- Don’t forget that a high potential return means high risk.
- Don’t buy a home if you think you’ll move in the next five years.
- Don’t invest 100% in stocks—or 100% in bonds.
- Don’t die without a will.
- Don’t buy trip-cancellation insurance.
- Don’t retire with debt.
- Don’t buy initial public stock offerings.
- Don’t throw away the advantages of index funds by actively trading them.
- Don’t claim Social Security at age 62.
- Don’t buy a tax-deferred annuity in an individual retirement account.
- Don’t apply for credit too often.
- Don’t use your taxable account to buy high-yield junk bonds or real estate investment trusts.
- Don’t opt for low insurance deductibles.
- Don’t fully fund your 401(k) if you smoke, drink heavily and never exercise.
- Don’t buy any fund with annual expenses above 0.35%.
- Don’t instinctively hang on to losing stocks.
- Don’t be surprised if every solution offered by an insurance salesman involves insurance.
- Don’t assume you—or anybody else—are smarter than the market.
- Don’t get your stock picks from your brother-in-law, your spam folder or the television.
- Don’t purchase life insurance if you don’t have financial dependents.
- Don’t pay a 6% real estate commission.
- Don’t opt for the extended warranty.
- Don’t invest heavily in your employer’s stock.
- Don’t purchase a house that’s bigger than you really need.
- Don’t day trade.
- Don’t have children if you hope to retire early.
- Don’t read anything into short-term market movements.
- Don’t buy investments without first settling on your financial goals.
- Don’t use more than 10% of the credit limit on your credit cards.
- Don’t buy an individual bond without figuring out what markup you’re paying.
- Don’t forget about inflation.
- Don’t buy an investment unless you’d be happy to hold it for 10 years.
- Don’t assume a commission-free stock trade is cost-free.
- Don’t buy based on past performance and expect it to persist.
- Don’t leave your ex-spouse listed as your 401(k) plan’s beneficiary.
- Don’t take out a large mortgage just for the tax deduction.
- Don’t keep money in the stock market that you’ll need to spend within five years.
- Don’t buy variable annuities.
- Don’t assume a high yield means a high return.
- Don’t pay bills late, especially loans and credit card payments.
- Don’t expect stocks to earn 10% a year, even over the long run.
- Don’t lend money to family members if you’ll need it back.
PEOPLE LOVE TO TALK about themselves. Today’s subject: me. Over my three decades of investing, I have tried to cultivate three traits. In other circumstances, none would be especially endearing. But as an investor, they’re my best friends.
I’m clueless. Occasionally, I forget how ignorant I am. I might convince myself that I know where interest rates are headed or that I’ve found a stock market sector that’s truly undervalued. Fortunately, after 30 years of investing, I have been wrong often enough in my forecasts that I almost never act on them.
I’m cheap. I may not be able to predict the market’s direction or figure out which stocks are bargain priced. But there’s still plenty to keep me busy. I am constantly striving to reduce my investment costs. That means sticking with low-cost index funds and doing everything possible to hold down my portfolio’s annual tax bill.
I’m a control freak. I don’t just try to control my investment costs. I am also intensely focused on controlling risk. Taking risk, of course, is a necessity if you want to earn healthy long-run returns.
But I don’t want to take more risk than is necessary, so I’m always looking for ways to better diversify my portfolio. In recent years, that’s meant adding small stakes in foreign real-estate investment trusts and gold stocks to my portfolio, and also increasing my exposure to overseas stocks. It also means regularly rebalancing, so market movements don’t drive my investment mix too far from the target portfolio weights I’ve set for myself.
“ONLY BORROW TO BUY things that’ll appreciate in value.” This was a popular piece of financial wisdom in the 1980s, when I started writing about personal finance. But I can’t recall anyone saying it in recent years. Does that mean this wisdom is no longer wise?
Financial habits have obviously changed. I might make just a single cash machine withdrawal each month, because I put almost every expenditure on my two credit cards, which I use to buy groceries, gas and restaurant meals—none of which has lasting value. Still, this is short-term borrowing that benefits me: I pay off the card balances as soon as the bills arrive, so I don’t incur any financing charges, while pocketing the credit card rewards and enjoying the convenience of using plastic.
What about longer-term borrowing? According to the Federal Reserve Bank of New York, U.S. consumers were $12.1 trillion in debt as of year-end 2015. Mortgage debt accounted for 72% of the total, student loans 10%, auto loans 9% and credit card debt 6%. With any luck, the mortgage will buy a home that appreciates in value and the student loans will increase income-earning ability. The car, by contrast, will almost certainly depreciate. But the car—or, at least, the version without leather seats—is also an economic necessity for many folks, who otherwise couldn’t get to work. Thus, it seems the vast majority of debt is indeed taken on to buy items that appreciate or have some lasting value.
But even if most money is borrowed for a good reason, it doesn’t necessarily mean borrowing is a good idea. Why not? First, the interest rate on our debts is typically higher than the interest we can earn by buying bonds, money market funds and certificates of deposit. This is true even for tax-deductible mortgage debt. The implication: To pay for our next major purchase, we should be less inclined to borrow—and instead sell conservative investments held in our taxable account.
Second, we shouldn’t borrow any money we can’t repay by retirement. Unfortunately, an increasing number of folks are quitting the workforce still burdened by debt. This isn’t smart, and not just because it boosts the cost of living for these retirees and makes their finances more precarious. With no paycheck to service their debts, retirees will need to dip into savings—and they could find themselves drawing heavily on individual retirement accounts and old 401(k) plans, with every dollar withdrawn taxed as ordinary income. Those retirement account withdrawals could, in turn, trigger taxes on up to 85% of a retiree’s Social Security benefit.
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1. You’re so well diversified that you always own at least one disappointing investment.
2. Your livelihood isn’t riding on both your paycheck and your employer’s stock.
3. If the stock market’s performance over the next five years was miserable, you wouldn’t be.
4. You can remember the last time you rebalanced.
5. You have no clue how your investments will perform, but a great handle on how much they’ll cost you.
6. You don’t have any hot stocks to boast about.
7. For every dollar you’ve salted away, you have an eventual use in mind—and the dollars are invested accordingly.
8. Jim Cramer? Who’s that?
9. A year from now, you plan to own the same investments.
10. You never say to yourself, “Wow, I didn’t expect that.”
11. You take tax losses when they’re available—but they aren’t available very often.
TOO MUCH CHOICE can be paralyzing. This is the reason many 401(k) plans have winnowed the list of funds they offer: Thanks to the smaller selection, participants are less likely to feel overwhelmed—and more likely to make an investment decision, rather than leaving their cash to languish in the plan’s money market fund.
I think this is a good strategy for other areas of our finances. For instance, you may make smarter investment decisions if you limit your choice by, say, deciding that you’ll never purchase individual stocks. You might also decide that you’ll stick with mutual funds from a single major fund company—think Fidelity, T. Rowe Price or Vanguard—or, alternatively, that you’ll purchase only index funds.
Similarly, you could narrow your room for maneuver by developing a written asset allocation, where you specify which market sectors you’ll invest in and what percentage of your portfolio you’ll allocate to each. You might earmark perhaps 30% for high-quality corporate bonds, 5% for real estate investment trusts, 5% for emerging stock markets and so on. That’ll still leave you with the decision of which investments to buy for each slot in your portfolio, but you’ll no longer be swimming in a pool of uncertainty that’s quite so large.
You might even use this strategy in other areas of your life, with a view to reducing uncertainty, saving time and perhaps also improving your own behavior. For instance, you might opt to do all your online shopping at Amazon, limit yourself to salads at lunchtime and only allow yourself to eat out twice a week. I think such rules can be useful, but there is a downside. You may reduce uncertainty by narrowing your choice. But these self-enforced rules can also introduce a new element of uncertainty, because you could find yourself wrestling with whether to follow your own rules—or stray from the straight-and-narrow path you chose for yourself.