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Class of 2014: Financial Advice That will CHANGE YOUR LIFE

  • May 29, 2014/
  • Posted By : admin/
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  • Under : Best Practices, Seeking Prudent Advice

PDS-CommencementThe following is a brief excerpt from the commencement address by Dr. Chris Mullis to the graduating class of Providence Day School on May 31, 2013.  The full text of Dr. Mullis’ speech, that includes career advice, financial guidance, and a few pearls of wisdom,  can be found here.

     At my investment advisory firm, we developed complex computer algorithms and use them to manage our clients’ investment portfolios.  But the basic steps you need to take to manage your own money well are deceptively simple. First, live within your means and avoid being caught up in rapid lifestyle inflation.  You will not live like your parents when you first start out. Second, save and invest your money wisely.  Let me elaborate on this point.

     Wealth accumulation depends on three factors: how much you save, the rate at which your money grows, and how long you save.  That last factor, time, is very, very important.  There’s an urban legend that Albert Einstein once said that compounding interest is the most powerful force in the Universe.  That quote is likely misattributed but the message is spot on.  If you save $5,000 a year for 40 years and earn 8% annually, you will eventually have $1.3M.  But if you delay starting for merely 5 years, your results after 35 years will be only $860k.  That 5-year delay preserved $25k of short-term capital but ultimately cost you >$400k in the long run.  Time is the most powerful lever in the machinery of investing.  Nothing else comes close to it.     

     So what do you need to do? Start saving and investing right out of high school regardless of how hard you think it hurts or how unpleasant the tradeoffs.  Even if you set aside only 5% of your paycheck starting out, do it to get into the habit of saving.  Delaying getting serious about investing until my 30s was a significant financial mistake on my part.  No one ever sat me down and explained how important it is to start investing early. Now that we’ve had this little talk, you’ll never be able to say that no one told you.


Know More, Make More

  • May 22, 2014/
  • Posted By : admin/
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  • Under : Best Practices, Performance, Personal Finance, Retirement, Seeking Prudent Advice

knowledge-powerA new academic study finds that more financially knowledgeable people earn a higher return on their 401(k) retirement savings.

Dr Robert Clark (NC State University), Dr. Annamaria Lusardi (George Washington University), and Dr.  Olivia Mitchell (University of Pennsylvania) analyzed a unique dataset that combined 401(k) performance data for 20,000 employees plus financial literacy data for the same workers.

Investors deemed to be more financially knowledgeable than peers enjoyed an estimated 1.3% higher annual return in their 401(k)s or other defined contribution plans than those with less knowledge.

According to the study’s authors:
“We show that more financially knowledgeable employees are also significantly more likely to hold stocks in their 401(k) plan portfolios. They can also anticipate significantly higher expected excess returns, which over a 30-year working career could build a retirement fund 25% larger than that of their less-knowledgeable peers.”

Financially savvy people tend to save more and are more likely to invest those savings in the stock market. But past studies haven’t clearly demonstrated that these people necessarily make better investment decisions. The authors look at patterns in 401(k) retirement accounts and find that more sophisticated investors do indeed get better returns on their savings.

Source: “Financial Knowledge and 401(k) Investment Performance”


Your House is Not a Great Investment

  • May 15, 2014/
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  • Under : Seeking Prudent Advice

Home ownership is one of the greatest financial investments you can make, right?  Wrong!  The chart below shows that once you adjust for inflation, home prices have been essentially unchanged over the past 100+ years except during a few spectacular bubbles.

housing-real-dollarsIn a recent interview, Professor Robert Shiller delved into the popular misconception that home ownership is a good “investment”.  Via the Motley Fool article:

“The housing boom in the early 2000s was driven by a sense that housing is a wonderful investment. It was not informed by good history,” he said. Most people now agree on that much.

“If you look at the history of the housing market, it hasn’t been a good provider of capital gains. It is a provider of housing services,” he explained.

By that, he means a home gives you a place to live, a place to sleep, a place to store your stuff.

But that’s it. Americans believed — and still believe — that the value of their home will increase above the rate of inflation.

And that, Shiller says, is wrong.

“Capital gains have not even been positive. From 1890 to 1990, real inflation-corrected home prices were virtually unchanged.”

Source: TMF


Elite Colleges Don’t Buy Happiness or Extra Money for Graduates

  • May 8, 2014/
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  • Under : Performance, Personal Finance, Saving Money, Seeking Prudent Advice

graduates

Attention high school seniors that were rejected by their first-choice college

A new Gallup survey of 30,000 college graduates of all ages in all 50 states has found that graduation from an elite college provides no discernible advantage over Podunk U.

“It matters very little where you go; it’s how you do it” that counts, said Brandon Busteed, executive director of Gallup Education.

Gallup’s data demonstrate that people that feel the happiest and most engaged are the most productive.  Those successful people got to that point by developing meaningful connections with professors or mentors, and made significant investments in long-term academic projects and extracurricular activities.

This new study’s results are well aligned with the existing body of academic research.  For example, economist Stacy Dale published  an insightful paper in 2004 that found that students who were accepted to elite schools, but attended less selective schools, went on to earn just as much money as their elite counterparts.

“Individual traits matter more than where you went,” Ms. Dale said. “It’s a lot more important what you learn later in life than where you got your undergraduate degree.”

Source: WSJ


Average U.S. Retirement Age Rises to 62

  • May 1, 2014/
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  • Under : Retirement

retirement_ageThe average age at which U.S. retirees report retiring is 62, the highest Gallup has found since first asking Americans this question in 1991. Current expectations for retirement have increased to age 66, up from 63 in 2002.

Why is retirement age on the rise?

  • Living longer – lifespans in the U.S. have increased
  • Better health – Americans are in better health in their senior years than ever before and better able to work later in life
  • More service and office jobs – less manual labor allows folks to stay working longer
  • Financial needs – not having enough cash to retire is another reason people retire later

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