Simplicity is a great foundation and powerful foil to unnecessary complexity. University of Chicago professor Harold Pollack champions this approach to personal finance and dashed out this index card to make his point.
We work with our clients to go above and beyond the common sense, but it’s built upon a strong foundation of essentials similar to Dr. Pollack’s.
Although the recently released “Solo” is losing money for Disney, the older Star Wars movies have some positive money perspective. Ryan Neal has a great piece on “Star Wars” lessons for financial planning. Here are some excerpts and adaptations to help you answer the perennial question, Is my financial advisor a Jedi Master?
The Power of Holistic Planning
As young Skywalker’s advisor, Obi Wan Kenobi teaches him that the Force, an energy field created by all living things that binds the galaxy together, is the source of his power. For financial advisors to truly unlock their potential, they need to have a holistic view of their clients’ financial lives, as well as a mastery of investment strategy. By understanding how various accounts, needs and goals all connect together, an advisor can be a truly powerful guide for their clients.
Sticking to the Plan
While Luke is a neophyte just learning the ways of the Force, Han Solo is a hardened skeptic, disregarding advisors like Obi Wan Kenobi and instead preferring the lifestyle of a risk taker, which has led him to real problems with debt. When Luke gets distracted by Solo’s taunts, Kenobi reminds him to trust in his plan instead of making knee-jerk reactions. While things get rocky along the way, Luke eventually reaches his goal of becoming a Jedi Knight. It’s a good reminder for when the markets get rough: Trust in the plan, mitigate short-term emotional reactions, and focus on long-term goals. Han may call it luck, but advisors know there’s no such thing.
The Quick and Easy Path Leads to the Dark Side
We learn more about the Force in the 1980s’ “Empire Strikes Back,” when Jedi master Yoda teaches Luke about the Dark Side. Like a good advisor, he tells Luke that chasing instant gratification, like investing heavily in a hot stock, can lead to ruin. When Luke ignores the advice, he’s almost defeated by Darth Vader. Yoda reminds us that patience is key with investing, not adventure or excitement.
Know Your Advisor’s True Value
Though his investment strategy might be questionable, Han Solo does understand value. Luke is shocked when Solo initially discloses his fees to pilot them across the galaxy in the Millennium Falcon. Luke says he could buy and pilot his own starship for less, but Obi Wan Kenobi knows expertise can command a fair price and even offers to spend more to ensure results. It turned out that Luke didn’t know flying through hyperspace from dusting crops, and Solo’s experience came in handy.
It’s Not Just About Money
Though Han Solo told Princess Leia that he doesn’t care about her or the rebellion, he becomes a true hero after he realizes that there’s more to life than money. Advisors are worth more than just allocating assets and providing returns; they can be even more valuable to clients by helping them navigate important milestones in life, like buying a home, sending kids to college, and retiring comfortably. Remember what Leia told Han: “If money is all that you love, then that’s what you’ll receive.”
Don’t Judge by Appearances
“Judge me by my size, do you?” Yoda may be small, but his power with the force is great. Similarly, many investors often think bigger is better and don’t realize that small boutique firms can provide superior guidance.
Source: WM
The 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.
Riffing off the widely-seen-but-rarely-followed food pyramid, advisor Tony Isola created the retirement pyramid. Remember how this works — you want to do a lot of the stuff at the bottom of the pyramid and very little to none of the high-level stuff. Follow this guide to be wealthier and healthier!
To define your investment philosophy, consider these key questions:
Source: AAII
Barry Ritholtz lays bare the myth…
Deep down inside, you already know this: There ain’t no such thing as a free lunch, financially or otherwise.
Of so many free lunches, this is the hard truth:
Source: BR
Legendary banker Richard Jenrette passed away last week at the age of 89. In his desk he left a hand-written note listing his 24 rules to succeed in finance and life. The note titled, “What I Learned (How to Succeed and have a Long and Happy Life),” was shared at his memorial service in Charleston, SC:
This is good advice for anyone!
Source: Bloomberg
Jason Zweig is a leading financial journalist and author. You’ll find his stuff in the Wall Street Journal several days a week. Buried within the appendix of his book, Your Money & Your Brain, is this great list of common sense rules that are commonly ignored.
Jason Zweig’s Rules for Investing
1. Take the Global View: Use a spreadsheet to track your total net worth — not day-to-day price fluctuations.
2. Hope for the best, but expect the worst: Brace for disaster via diversification and learning market history. Expect good investments to do poorly from time to time. Don’t allow temporary under-performance or disaster to cause you to panic.
3. Investigate, then invest: Study companies’ financial statement, mutual funds’ prospectus, and advisors’ background. Do your homework!
4. Never say always: Never put more than 10% of your net worth into any one investment.
5. Know what you don’t know: Don’t believe you know everything. Look across different time periods; ask what might make an investment go down.
6. The past is not prologue: Investors buy low sell high! They don’t buy something merely because it is trending higher.
7. Weigh what they say: Ask any forecaster for their complete track record of predictions. Before deploying a strategy, gather objective evidence of its performance.
8. If it sounds too good to be true, it probably is: High Return + Low Risk + Short Time = Fraud.
9. Costs are killers: Trading costs can equal 1%; Mutual fund fees are another 1-2%; If middlemen take 3-5% of your cash, its a huge drag on returns.
10. Eggs go splat: Never put all your eggs in one basket; diversify across U.S., Foreign stocks, bonds and cash. Never fill your 401(k) with employee company stock.
Arthur Zeikel, president of Merrill Lynch Asset Management, sent his daughter a letter teaching her some investing basics.
Enjoy!
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Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined financial goal by balancing one’s risk-tolerance level with the desire to enhance capital wealth. Good investment management practices are complex and time consuming, requiring discipline, patience, and consistency of application. Too many investors fail to follow some simple, time-tested tenets that improve the odds of achieving success and, at the same time, reduce the anxiety naturally associated with an uncertain undertaking.
I hope the following advice will help:
A fool and his money are soon parted. Investment capital becomes a perishable commodity if not handled properly. Be serious. Pay attention to your financial affairs. Take an active, intensive interest. If you don’t, why should anyone else?
There is no free lunch. Risk and return are interrelated. Set reasonable objectives using history as a guide. All returns relate to inflation. Better to be safe than sorry. Never up, never in. Most investors underestimate the stress of a high-risk portfolio on the way down.
Don’t put all your eggs in one basket. Diversify. Asset allocation determines the rate of return. Stocks beat bonds over time.
Never overreach for yield. Remember, leverage works both ways. More money has been lost searching for yield than at the point of a gun (Ray DeVoe).
Spend interest, never principal, If at all possible, take out less than comes in. Then a portfolio grows in value and lasts forever. The other way around, it can be diminished quite rapidly.
You cannot eat relative performance. Measure results on a total return, portfolio basis against your own objectives, not someone else’s.
Don’t be afraid to take a loss. Mistakes are part of the game. The cost price of a security is a matter of historical insignificance, of interest only to the IRS. Averaging down, which is different from dollar cost averaging, means the first decision was a mistake. It is a technique used to avoid admitting a mistake or to recover a loss against the odds. When in doubt, get out. The first loss is not only the best, but is also usually the smallest.
Watch out for fads. Hula hoops and bowling alleys (among others) didn’t last. There are no permanent shortages (or oversupplies). Every trend creates its own countervailing force. Expect the unexpected.
Act. Make decisions. No amount of information can remove all uncertainty. Have confidence in your moves. Better to be approximately right than precisely wrong.
Take the long view. Don’t panic under short-term transitory developments. Stick to your plan. Prevent emotion from overtaking reason. Market timing generally doesn’t work. Recognize the rhythm of events.
Remember the value of common sense. No system works all of the time. History is a guide, not a template.
This is all you really need to know.
When this article was originally published in 1995, Arthur Zeikel was president of Merrill Lynch Asset Management in New Jersey.
Source: Forbes
The map above from howmuch shows how much salary you need to afford the average home in your state. This a quick snapshot of housing affordability across the United States.
Top five places where you need the highest salaries to afford the average house:
Top five places where you need the lowest salaries to afford the average house:
Source: howmuch
