We believe that financial success will lead us to happiness. There’s the adage: “money can’t buy happiness” and broadly speaking, I agree with that. But, there’s no ignoring that financial stress is cited as the leading cause of divorce. Tragically, financial loss or instability has led people and families down destructive paths. While money may not buy happiness, financial stability and comfort is a crucial ingredient for most in finding that happiness. That’s why you’re here reading this article. That’s why I’m here writing it – and crucially – why I am a financial advisor.
There’s a lot that goes into financial success. Some of these things, like developing an effective asset allocation, selecting appropriate investments, and managing tax considerations require quite a bit of knowledge and often formal training to be executed effectively. However, there are numerous non-financial “skills” that are essential to achieving financial success, as well. These skills don’t require advanced education, technical prowess, or a deep understanding of math or statistics. These are things that with a little willpower, you can control and influence yourself.
We’ve all heard about the Washingtonian stories of D.C. area families with net incomes of $250,000+ that are “just scraping by”. They have a nice house. Not the nicest one on the block, but it’s a reasonable 3,000-sqft home with a good yard for the kids to play in. Those kids go to Gonzaga, Georgetown Prep or even public school, if they live in Fairfax County. They vacation, but only to their place on the lake – not abroad, at least not this year. The landscaper raised his price last Spring. They recently bought a used, 2017 BMW 3 Series. The plan was to get a new BMW 530i – but, money is tight.
Look, that example is easy to lampoon, but lifestyle creep and overspending occur at all income levels. An un-intuitive observation we see in personal finance is when individuals receive a raise or promotion at work, this sometimes ends up having a negative effect on their retirement prospects. Their lifestyle quickly adapts to the extra income and creates a new, higher baseline of living expenses that will need to be replaced in retirement. We’ve developed financial plans for hundreds of families. I’ve seen households with a few hundred thousand dollars in retirement assets with the ability to comfortably live past 100. I’ve seen other families with several million dollars in retirement assets projected to run out of money in their 70’s.
We all like to think that if I just can make $X, I can finally relax and be secure. In reality, once we reach $X, we adapt and starting pining for $Y. It’s all based on lifestyle relative to financial assets. I don’t mean to suggest that everyone be a miser. I just want to implore readers to understand the simple fact that the easiest way to take control of your financial life is to learn to live with less. When you receive a raise, don’t let your spending get the same raise.
All the wealth in the world isn’t going to mean much if you die early and/or live in poor health. Also, bear in mind how expensive medical treatment in the United States is. Keeping yourself out of the doctor’s office can be one of the more effective financial strategies you can employ.
Smoking is bad for you, obviously. I won’t waste space recounting why that is. But, I do want to highlight what being a smoker means to your bottom line, particularly when it comes to insurance. From TransAmerica, a 20-year level term life insurance policy for $500,000 covering a 50-year old, non-smoker, healthy male is priced at $81.35/month. For an otherwise healthy smoker, the premium is $337.75/month. This is more than a four times as much. Over the life of this insurance policy that is a premium difference of $61,500! The same pattern holds with disability and long term care insurance, as well. As a smoker, the expected total additional outlay for adequate insurance coverage (which, a smoker is going to want) can be over $100,000 – not to mention the cost of cigarettes themselves over a few decades.
I’m not going to pretend to be a nutritional expert. In fact, I get into frequent, repetitive arguments with a friend of mine over whether fat is good or bad for you. What’s healthy and what isn’t has been evolving over the past handful of decades, but there’s been one constant in nutritional science this whole time: Sugar is bad for you. Sugar consumption causes your glucose levels to fluctuate violently. This makes you moody, causes fatigue, may trigger headaches, and tricks your body into craving more food. There are also the more insidious, long-term effects of sugar consumption: Greatly increased risk of obesity, diabetes, heart disease.
Back in high school, I had a track coach that told me “If you don’t lift heavy things, you’re going to be in a wheel chair.” Dire words, but on an impressionable teenager, they’ve stuck. The benefits of strength development are two-fold. Orthopedically, strength training creates and preserves muscle mass and bone density. I don’t think I can overstate the benefits of having mobility, in particular being able to move without pain. Getting into a habit of engaging in strength training exercises can greatly reduce the risk of debilitating, quality-of-life injuries to the hips or back. Metabolically, strength training (unlike cardiovascular activity, at least on a relative basis) paves the way for efficient processing and disposal of glucose. Muscles, more than any other organ or function in the body, are the best at regulating glucose levels. As noted above, regulation of glucose goes a long way toward making you both feel healthy and be healthy.
Don’t smoke, don’t eat sugar, lift weights and never stop.
The securities in a portfolio, the fees, and the know-how to allocate assets are obviously all important pieces of a successful investment experience. But, the edge gained or lost by all of those factors pale in comparison to the true arbiter of investment success: Behavior. So, here are some things to consider to get in the right frame of mind about investing.
What’s the first rule of investing? Buy low and sell high. This is wrong. The first rule of investing should be buy low and sell never. Good trades generally don’t make people wealthy. Compounding makes people wealthy. The problem with setting ‘sell’ as the goal is that this promotes a trading mindset. Frequent trading usually doesn’t work out too well, all the while driving up transaction costs. Selling is something that should be done pursuant to financial goals and needs, such as rebalancing or making withdrawals for planned goals.
Understand and come to terms with the fact that luck is going to play a prominent role in investment results. An investor tracking large cap, US stocks (S&P 500) beginning in 1960 would have returned 6.83%, annualized over a 20-year period. An investor who began in 1980 would have returned 17.88% tracking the same index. Since 2000, investors have managed 5.75% in the S&P 500. In all cases, these investors are employing identical strategies for allocating investments. The only difference is the decades in which they were investing. The investor who started in the ‘80s would have been able to under-perform the market by 5% and still would have produced better results than an investor in the ‘60s who outperformed the market by 5%.
Lots of un-intuitive things happen in the market. Best Buy has nearly double the annualized performance of the S&P 500 over the past three years. This is amidst Best Buy retail stores across the country consolidating as Amazon cannibalizes their market share. BlackBerry stock went up 62% last year. I don’t think I’ve heard of a new BlackBerry product this decade.
The common thread here is humility and to focus your attention to the things that you are actually able to control. This ethos will go a long way toward achieving financial success, even without ever taking an economics class.
*All performance information is from Morningstar as of 9/30/2018. Insurance premium information from TransAmerica as of 9/24/2018.
Once you determine that it might be time to work with a financial advisor, it’s important to find the right advisor for you and your family. We’ve put together a guide of questions that are essential to ask an advisor before you hire them.
Don’t make a mistake by working with the wrong financial advisor. Ask the right questions the first time to determine if a financial advisor is right for you.