Recently, I had the distinct privilege to join Sheinelle Jones on the Today show, discussing some rapid-fire personal finance issues in Simple Money style. Is now a good time to buy stocks? Is it a good time to buy, sell, refinance or renovate a home? We even discussed a version of the Simple Money Portfolio and my top two picks for cash flow apps that can improve your financial situation. Click HERE or on the image below to view the segment.
That may seem like an odd observation, unless you consider the fact that I had the privilege of spending a couple days recently with life planning luminary George Kinder. Among other benefits, I was able to reacquaint myself with his famous three questions, elegantly designed to progressively point us toward the stuff of life that is the most important–to us.
The final question invites us to explore what benchmark life experiences we would leave unaccomplished if we only had one day left on this Earth. And as you may suspect, even in a room filled with financial planners, achieving a more aggressive portfolio posture was, perhaps, the farthest from anyone’s mind.
Meanwhile, most of the items that people did list represented experiences (not things) that, individually, were outside of their to-date unarticulated–but now evident–comfort zones.
Participants almost universally wished they’d have taken more risks in life–personally, educationally, relationally, experientially, professionally and vocationally.
Similarly, those most meaningful experiences they had enjoyed thus far in life were the ones that pushed the boundaries of their comfort zones, expanding their personal risk tolerance.
But what about financial risk tolerance?
It’s now been well established that humans generally make poor investment decisions. The field of behavioral finance and economics has helped explain why:
- The pain of loss is twice as powerful as the joy of gain.
- We’re even more risk averse than we think.
- Furthermore, we only have so much risk tolerance in life to spend.
Yes, we each have a unique tolerance for risk, but regardless of how full our risk reservoir is, it is still an exhaustible resource. Therefore, the more risk you’re taking in your portfolio–the more volatility that you are enduring and the more resolve you’re expending to stay the course–the less risk you have to spend on the rest of your life.
There are those in my field who’ve made it their life’s work to convince investors of the benefits of risk-taking in investing. And to be clear, those benefits have proven, historically, to be real. Those who take more risk in investing–strategically, mind you, not haphazardly–may justifiably expect to receive greater rewards from their investment portfolio over the long-term.
But at what cost? How much risk tolerance did you have to expend to endure losing at least half the value of your aggressive, well-diversified all-equity portfolio during the worst of the financial crisis? How much sleep lost? How many more meaningful life experiences did you pass on while you were exhausting your resolve to stay the proverbial course?
And for what benefit? Assuming you didn’t do what studies suggest we’re prone to do–bail out at the worst possible time, thereby eliminating any benefit whatsoever to the white-knuckle ride–you may have made more money.
But can you get the best of both worlds? All-equity returns with less risk? Historically, at least, the answer is yes.
Thanks especially to the groundbreaking work of economists Eugene Fama and Kenneth French (and the number-crunching of my colleagues, Larry Swedroe and Kevin Grogan), we find evidence that an optimally diversified portfolio with only 60% exposure to stock volatility has enjoyed returns nearly equal to the 100%-stock S&P 500 index (going all the way back to 1927).
But with 40% in stabilizing short-term government bonds, this simple portfolio has required less of an expenditure in personal risk tolerance because it has endured meaningfully less volatility than the all-equity index.
So, how do you want to spend your tolerance for risk? Glued to every market update, stressed through every downturn, fighting the temptation to capitulate at the bottom?
Or pursuing the hopes, dreams and goals in life that bring the deeper meaning we seek?
If you’re interested in learning more about the simple portfolio referred to above, I’ve recently released an ebook, Simple Money Portfolio, that TimMaurer.com readers can download for free by clicking HERE.
My favorite discovery in the field of behavioral economics confirms what we already knew deep down, even if it contradicts “common sense”–that experiences are more valuable than stuff. I recently put this finding to the test:
Concert of a Lifetime
Those were my wife’s words when I called her from the road, rushing to discuss what I termed “the concert of a lifetime.”
I’d just learned that living legends U2 were touring in support of the 30th anniversary of their most celebrated album, “The Joshua Tree.”
The greatest live band of a generation playing the soundtrack of my youth from start to finish.
Andrea was on board with going to the show–she’s a big fan, too. But what invited her claim of insanity was my insistence that we take the whole family to Seattle to see the show. We live in Charleston. South Carolina.
But the Seattle show promised to be superior to almost all others along the route. In the Emerald City, the Emerald Isle’s most melodic export would be supported by Mumford and Sons as the opening act, playing only the first three West Coast stops.
The two best live bands performing in one of the world’s greatest cities in a single concert.
(In case you’re wondering, music is not subjective, but objective. These are all facts.)
I insisted that we had a moral obligation to go as a family–assuring my wife that it would result in a lifelong memory soon to be deemed priceless.
Now, we’re a family of four (and a half) with two boys–13 and 11–in youth sports (and an adorable puppy). One could argue that every piece of furniture in our home is a candidate for replacement.
If you are in–or remember–or tried to forget–this phase of life, you know that, regardless of your income, every dollar seems to be pledged even before it is earned. Even when you’re occasionally surprised by a surplus inflow, it feels like the money has already been spent (if it hasn’t) on the necessity du jour.
Experiences > Stuff
But a mathematical fact remains: There are only two ways to dispose of our money–on experiences or stuff. Even if we save, invest or give, we’re just deferring when and where the money will be spent on experiences or stuff.
Our eyes tell us that stuff is worth more because we can see it.
But our hearts know what has now been proven in numerous studies–that we derive more joy from [insert experience] than by purchasing a [product of comparable price].
For our family, going to see Mumford and U2 in Seattle was simply more valuable than something like … replacing the battered couch, maybe the bedroom furniture.
But why? It’s not necessarily because it’s obvious from the start. Initially, the experience worth $X gives about the same amount of joy as the stuff worth $X. But as we adapt to the stuff, as it literally depreciates in value, our joy in its utilization also decreases. Or as Cornell psychologist Dr. Thomas Gilovich puts it, “One of the enemies of happiness is adaptation.”
But while stuff devalues, the recently elapsed experience can actually increase in value. “Even if it was negative in the moment,” writes James Hamblin in the The Atlantic, “it becomes positive after the fact. That’s a lot harder to do with material purchases because they’re right there in front of you.”
Furthermore, those material purchases aren’t only in front of you. They’re in front of lots of people who have the same thing–or better. My black four-door Jeep was awesome until my buddy pulled up–right behind me–in his black four-door Moab-edition Jeep (with the top down and the doors off).
The intangible nature of experience means that no one has the exact same one. Meanwhile, having shared experiences compounds their value further, as diverse recollections tend to open our eyes to elements we didn’t catch the first time around.
Sadly, despite the conviction in our collective gut and the studies that prove it’s right, “People do not accurately forecast the economic benefits of experiential purchases. ”
Where the Streets Have No Name
By now, you know what happened, right? Yes, my loving wife succumbed to my outlandish pledge that “this will be the best memory we’ve ever had as a family!” We scraped together all the respective rewards points and discretionary dollars we could muster, ordered the tickets, booked the flights and reserved the room.
We fought through jet lag to enjoy hiking in a blizzard on Mt. Ranier, having coffee at the first-ever Starbucks, enjoying breakfast overlooking a bustling Pike Place Market, going up the Space Needle and down the Great Wheel, taking in a comedy show at a vintage theater near University of Washington, running to catch the ferry to Bainbridge Island for lunch and–the best part–watching my boys’ eyes light up as the prelude to “Where the Streets Have No Name” rumbled through our bellies.
On the plane ride home–gloriously exhausted–my wife turned to me and said, “You were right. It was worth it. But you’re still crazy.”
She’s right. About all of it.
I fear that I’m going to miss the proverbial wheat because of all the darn chaff overstuffing my inbox. You, too?
Well, apparently we’re in good company. As a student of behavioral economics and finance, my ears always perk up when behavioral economist Dan Ariely has something to say. He struggled so much with managing the daily email harvest that he decided to create two apps, one that helps people send him better emails and another that helps him prioritize the emails he receives.
This inspired some colleagues and me to ask: “What are the ways that we might be contributing to the chaff in the inboxes of our business associates and friends?”
What are the often unspoken rules of good email etiquette? Here’s what we came up with…
The 10 Commandments of Business Email:
1. Thou shalt not gratuitously “cc.”
You’re on it–they know.
2. Thou shalt not needlessly reply all.
In addition to cluttering the inboxes of the needlessly cc’d (see above), avoiding the “reply all” button will also reduce the probability that you’ll fire off one of those unintended, embarrassing emails in which you roast someone you forgot to exclude on the thread. Which leads to…
3. Thou shalt not write anything in an email you wouldn’t want to be on the front page of The New York Times.
Two words: paper trail. This will also help ensure your prospective run for public office won’t be derailed.
4. Thou shalt not reply solely with “Thanks.”
Let’s just collectively agree to assume everyone is thankful, thereby eliminating 3-5% of all emails.
5. Thou shalt not bury the main point of your correspondence deep within the body, instead accomplishing as much as possible with the subject line.
Heck, see if you can limit the email to subject line only. And instead of beginning with any smalltalk, get right to the point and save the pleasantries until the end.
6. Thou shalt not forward lengthy email exchanges to a new audience with the direction, “See below.”
Now they have to read your email–and five to six others! Start a new email that summarizes and then ask your question.
7. Thou shalt not follow up an email within two hours asking, “Didst thou receive my email?”
“Such a thing is an abomination unto productivity,” says time management author Laura Vanderkam.
8. Thou shalt minimize the number of topics, questions or themes to as few as possible (preferably one).
You’re more likely to get answers to all of your questions if you only ask one.
9. Thou shalt limit the body of one’s email to five sentences.
This will help ensure you don’t receive the dreaded “TLDR” (too long; didn’t read) response.
10. Thou shalt indicate whether a response is necessary and, if so, a desired response time.
And “if the desired response is less than four hours, thou shalt pick up the phone and call instead,” says Vanderkam.
There’s no judgement here. We’ve all sinned and fallen short on every one of these commandments–and likely will again!
Of course, there are even some exceptions to some of these rules, but just imagine how much cleaner all of our inboxes would be if we’d follow these commandments.
For more, take a look at the following resources:
- The Ariely-inspired tools Shortwhale and Filtr
- The Atlantic article “A Behavioral Economist Tries to Fix Email”
- The New York Magazine article “Stop Apologizing for the Delayed Response in Our Emails”
- The “MacSparky Field Guide to Email” ebook
Oh, and by the way–of course I want to read YOUR email. That’s the whole point! Check out my new Shortwhale page.
Parents have sacrificed their financial futures on the altar of their children’s education. Fueled by easy federal money and self-interested colleges, the result is a student loan crisis that appears already to be eclipsing the catastrophic proportions of mortgage indebtedness leading up to the financial collapse of 2008.
Please allow me to disclaim a few things:
- I’m not anti-education. In fact, I valued my college education so much that I went back to teach at my alma mater, Towson University, for seven years.
- I believe that a college education is a) inherently valuable, b) an enhancer of career prospects and c) fertile ground for unforgettable life experiences beyond the classroom.
- I’m a parent. I’ve encouraged my two sons, 13 and 11, to strive for a college education, and I’ve also offered to share in the financial burden.
- I’m not a prognosticator. Therefore, I’m not predicting an imminent crisis akin to the Great Recession, led by student loan defaults. Crystal balls don’t work, and anyone who claims to have one is selling something.
I’m also not a conspiracy theorist, but the facts, according to a new Wall Street Journal article, are indisputable:
- Overall student debt—with over 42 million loans outstanding—is north of $1.3 trillion.
- Roughly 40% of borrowers had credit scores below the subprime threshold of 620. Subprime mortgages peaked at nearly 20% of mortgage originations in 2006.
- The vast majority of the loans were originated by the federal government and cannot be eliminated, even in bankruptcy.
- As of September 2015, 11% of borrowers had gone at least a year without making a payment on a Parent Plus loan. That exceeds the default rate on U.S. mortgages at the peak of the housing crisis.
- A new generation of retirees is now having to reduce their tax refunds and Social Security benefits in order to pay delinquent loans.
Parent Plus loans, by the way, are those that parents take out to cover tuition and living expenses typically after kids have maxed out their student debt allowance, ensuring that both the apple and the tree are sufficiently indebted.
Interestingly enough, all the way back in 2011, the Obama administration placed tighter restrictions on Parent Plus loans due to concern that unqualified borrowers were loading up on unsecured debt. But schools put up a fight (successfully), suggesting that such limits impaired students’ ability to get an education.
And this is where we get a glimpse of the fundamental problem: Education has been deemed invaluable—at any price.
Yes, college can be very expensive. The cost of college education has risen well above inflation for decades, resulting in apparent absurdity. (Really, you’re telling me that the collective benefits of any college experience are worth $65,000—per year? Really?)
BUT, college doesn’t have to be outrageously expensive.
A student who commutes to a community college for two years and then transfers to State U for the final two years can get an undergraduate degree from a reputable university for the same cost as a single semester on campus at an elite private school.
With $1.3 trillion in school loan debt, a lot of water has already flowed under the collegiate bridge, but I’ll speak to those parents and students who’ve yet to burden themselves:
Sacrificing yourself financially for the sake of writing your children a blank check for education isn’t generous—it’s actually selfish. It would be much less expensive for a young adult to pay off a reasonable college loan than to bail out his or her parents who’ve run out of money in retirement and have health care bills piling up.
As they instruct on the airplane, you have to take care of yourself before you can take care of those who depend on you. Your long-term financial security (including your retirement) is a priority over your children’s education—for both of your sakes. And there are few opportunities more ripe for teaching our children financial and life wisdom than the discussions regarding college.
(If you’re looking for some guidance, here’s my “Non-Conformist’s 4-Step Education Savings Plan.”)
Please don’t take advantage of your parents. They love you, and they desperately want to see you succeed in life. But if you let them take on loans so you can party your way to a diploma, it could literally ruin them financially.
And if you’re like many who are navigating this decision on your own, please realize that the mystique of the college experience loses its luster very quickly if you’re buried in student loan debt. College truly is a value proposition, so try to restrict your total student loan debt to no more than you expect to make in your first year’s salary.
Then you’ll be able to enjoy employing your education without being stalked by its cost.
Just for fun, Google the words “market pullback.” There are over 2.2 million results–most of them market predictions–and the first page of results is dominated by calls for an imminent market reversal that the simple desk calendar has already proven false.
However, despite their worthlessness, market predictions remain as predictable as market opens and closes. (And I predict no end in sight.)
First, there’s a clear profit motive. Apparent urgency leads to activity, and activity is still how most of the financial services industry makes its money.
“Bullish predictions encourage investors to pour fresh money into the markets, helping asset management companies to enjoy rising profits,” the New York Times reported, noting that the Wall Street forecaster’s consensus since 2000 has averaged a 9.5% increase each year. They accidentally got it (almost) right in 2016, but in 2008, the consensus prognostication missed the mark by 49 percentage points (an outcome that makes your local weatherman seem like a harbinger of accuracy)!
But not everyone’s positive either. My colleague and the co-author of the new book “Your Complete Guide To Factor-Based Investing,” Larry Swedroe, analyzed Marc Faber’s perpetually cataclysmic proclamations and rendered the good doctor “without a clue.”
It’s old news that we’re busy and that we wear our busyness as a badge of honor. But a new study found that Americans, in particular, are actually buying it. Specifically, the study concluded that Americans who always say they’re “busy” are actually seen as more important. Unfortunately, it’s all a charade.
Numerous studies have shown that busyness isn’t actually good business, and here’s the big reason why: It makes us less productive. We’re all susceptible to it, but If I’m saying to myself (and I have), “Woo, I’m busy; really busy,” I’m likely being distracted from the most important, most productive work that I could be doing. I may feel like I’m doing more, but the net result is actually less. And it often feels like it.
But not everyone wears busyness as a status symbol. In response to the research and their own well-informed gut feelings, many are finding enjoyment in more productive work at a less busy pace. I wanted to know how these people recognize when they’re devolving into busyness and what they do to stop the downward spiral, so I asked 12 thought leaders who’ve inspired me two simple questions:
- How do you know when you’ve gotten too busy?
- What is a technique that you use to “unbusy” yourself?
Here’s what they had to say:
In 1967, the Beatles released the song, “When I’m Sixty-Four.” The lyrics are a preemptive plea to secure a relationship even when the realities of old age set in. Now, as the nation’s largest generation whistles this tune into retirement, the question seems less rhetorical:
Who is going to take care of us in retirement?
Not everyone will need long-term care insurance (LTC), but everyone needs a long-term healthcare plan. Your long-term care plan should incorporate the following: facts about you (and your spouse, if applicable), your age, your personal health, longevity of lineage, your retirement income and assets, your tolerance for risk, the costs and demographics of long-term care in your geographic area and information about any long-term care insurance that you own or have considered owning.
This post is the second in a two-part series. You can read the first on Long-Term Disability (LTD) by clicking HERE.
Long-Term Care Insurance
One very important thing to remember is that Medicare does not cover the costs of most long-term care needs. Allen Hamm, in his book, Long-Term Care Planning, shares the following statistics:
- 71 percent of Medicare recipients mistakenly believe Medicare is a primary source for covering long-term care.
- 87 percent of people under the age of 65 mistakenly believe their private health insurance will cover the cost of long-term care.
As an educator in the arena of personal finance, I generally avoid matters of public policy or politics because they tend to devolve into dogma and division, all too often leaving wisdom and understanding behind. But occasionally, an issue arises of such importance that I feel an obligation to advocate on behalf of those who don’t have a voice. The issue of the day revolves around a single word: “fiduciary.”
At stake is a Department of Labor ruling set to take effect this coming April that would require any financial advisor, stock broker or insurance agent directing a client’s retirement account to act in the best interest of that client. In other words, the rule would require such advisors to act as a fiduciary. The incoming Trump administration has hit the pause button on that rule, a move that many feel is merely a precursor to the rule’s demise.
Why? Because a vocal constituency of the new administration has lobbied for it—hard. They stand to lose billions—with a “b”—so they’re protecting their profitable turf with every means necessary, even twisted logic.
The good news is that informed investors need not rely on any legislation to ensure they are receiving a fiduciary level of service. Follow these three steps to receive the level of service you deserve:
The Trump administration’s move to delay implementation of the Department of Labor’s fiduciary rule has inspired me to delay implementation of my commitment to remain silent on matters of public policy and politics. It’s that important.
It seems pretty obvious that those in the financial establishment who oppose the rule do so primarily out of self-interest. After all, it’s estimated that they will lose billions in profits if the final rule goes into effect. I get it.
But I was fascinated recently when a member of the media wondered aloud if my advocacy for a wider fiduciary standard was also simply an outgrowth of my own bias.
Indeed, who’s to say I’m not just grinding my own axe on this issue? Maybe I’m in favor of all financial advisors being held to a fiduciary standard because I’m a fiduciary financial advisor and part of a national community of financial advisors that supports the fiduciary standard.
That would be a convenient rebuttal from the anti-fiduciary community, but here’s the (huge) problem with that rationale:
Much—too much—has been said and written about the relative superiority of Roth IRAs versus Traditional IRAs. The debate over which is better too often involves the technical numerical merits. In truth, the Roth wins in almost every situation because of its massive behavioral advantage: a dollar in a Roth IRA is (almost) always worth more than a dollar in a Traditional IRA. This is true regardless of one’s age, but the Roth IRA is even more advantageous for Millennials.
I must first disclaim that you can disregard any discussion of Roth or Traditional IRA if you’re not taking full advantage of a corporate match in your employer’s 401(k)—free money is still better than tax-free money. But after you’ve “maxed out” the match in your corporate retirement account, here are the top three reasons Millennials should consider putting their next dollar of savings in a Roth IRA:
1) Life is liquid, but most retirement savings isn’t.
Yes, of course, in a perfect, linear world, every dollar we put in a retirement account would forevermore remain earmarked for our financial futures. But hyperbolic discounting—and the penalties and tax punishments associated with early withdrawal from most retirement savings vehicles—can scare us away from saving today for the distant future. The further the future, the more we fear.
The Roth IRA, however, allows you to remove whatever contributions you’ve made—your principal—without any taxes or penalties at any time for any reason. Therefore, even though I’d prefer you to generally employ a set-it-and-forget-it rule with your Roth and not touch it, if the privilege of liquidity in a Roth helps you save for retirement, I’m all for it.