In my last post, I talked about the need for prudence in the current market environment. It is a message that has been well received by most people that I talk to. But the discussion often turns to “Well, what does that mean?”Prudence as an over riding philosophy sounds great, but how do we put that into practice? One way to address this is the Barbell Approach. In investing, the Barbell Approach is a strategy with two components. On one side is a very aggressive and potentially volatile investment with high expected returns. On the other side is a conservative cash-like investment with lower return expectations. This helps smooth out the overall volatility of your strategy. It also potentially gives you dry powder to invest when volatility turns down.
During the second half of 2017, I spent a lot of time with clients walking through annual market reviews. I would like to share some of the insights that have come out of those meetings. There are two broad areas of focus: investment implications and personal finance implications (or, as I like to think of it, regular old life implications).
Over the last several months, I have spent upwards of 50 to 60 hours researching bitcoin, crypto assets and blockchain. I’ve had several questions from clients on bitcoin and blockchain. My research is designed to answer one basic question: Is bitcoin a good investment?
The short answer is “No”
The somewhat longer answer is...
Recently I read an article in the Wall Street Journal titled: “Homeowners Are Again Pocketing Cash as They Refinance Properties” (subscription required). My first thought: Here we go again.
Unfortunately, the article was mostly positive on the development, as the writer’s take was that this reflects confidence in the economy and relative job security. I have no idea if this bodes well for the economy or not (although my intuition says it’s a negative), but on an individual level I think this is a really bad idea. There are no absolutes in personal finance, and everyone’s situation is different. With that caveat out of the way, lets look at why taking cash out of your home when you refinance can be a poor financial decision.
Life gets complicated quickly. That doesn’t mean that our response needs to be complicated. I recently read the book Simple Rules by Donald Sull and Kathleen M. Eisenhart. They discuss the use of simple rules and why they are so successful in the face complex situations. These types of situations range from surgical triage to dieting. It turns out that simple rules can help us make much better functional decisions because they allow us to focus on variables that really make a difference while allowing for flexibility to pursue new opportunities as they arise.
Many people pay a lot of attention to the little things in their financial lives and lose sight of the bigger, more important ones. For example, I hear people talking about cutting out their favorite coffee drink to save money. This is not a bad idea, and savings, wherever you find them, are helpful. But often these same people are making large financial mistakes that they don’t realize are costing them hundreds of dollars a month.
I recommend focusing on the big financial issues: income, housing expenses, car expenses and other major costs in your life. Get the big things right, and the other puzzle pieces are much easier to fit together.
Recently I was talking with a friend about how much I like running. It’s simple, you can just lace up and go. It’s meditative, allowing for introspection and mind-wandering. And it’s great cardiovascular exercise. I looked at my friend expectantly.
“I hate running,” he said.
“But why?” I was at a loss that he couldn’t comprehend my passion.
“Because it’s boring … and hard.”
The idea of talking with a financial advisor makes many people feel the same way they feel about a trip to the dentist: not thrilled. After all, financial planning requires that we think through and talk about how to deal with scary or unpleasant circumstances.
But good financial planning isn’t just about downside protection. It’s also about planning so people can do the exciting and meaningful things that make life wonderful.
In financial theory, risk is equated with volatility. Often this is described mathematically as standard deviation, a measure of how much variation there is in the data. Although the math that illustrates this concept is relatively straightforward, it is not helpful in understanding risk in terms of investor behavior.
When I work with clients, I discuss risk in a much different way. I use simple illustrations to show clients what might happen to their portfolio in a downturn.
To make it even easier to grasp, I talk about real dollars, not percentages. People tend to be comfortable talking about percentages when their portfolio rises, but not when it falls. “We made 5% this quarter,” they’ll say. But when investors see declines in their portfolios they think in dollars: “We lost $50,000 last year.”
Today's note is a little more industry oriented than normal. Still, I thought you would be interested because it touches on my philosophies regarding Financial Planning:
Recently I got into a Twitter conversation (yes, I tweet. You can follow me at the bottom of the note) regarding an article claiming that most millennials shouldn’t be bothered with financial planning. One advisor responded that most people under the age of 50 don’t even need financial advice. Just “save as much as you can in your 401(k) and Roth,” this advisor wrote.
I completely disagree. This line of thinking is a peeve of mine. In fact, it’s more than a peeve — I set up my firm specifically to help these types of clients and work with them over the entire course of their financial lives.
Note: The contents of this site are general in nature and not intended as specific investment advice. All investments are subject to risk; including loss of investment value. If you have any question regarding investments or concepts in these pages, please consult with an investment professional.