Happy Compromises

Adam M. Grossman

A LITTLE WHILE BACK, a friend—let’s call him Paul—recommended a book with an unusual title: How Not to Die. As you might guess, it’s about health, nutrition and longevity. Since Paul is a cardiologist and knows a thing or two about what can land people in hospital, I took his recommendation seriously and immediately ordered a copy.

When the book arrived, I learned that the prescription for not dying isn’t so simple. In fact, it runs nearly 600 pages. Result: The book sat on my shelf, unopened, for several months.

Recently, though, I was leafing through it and got to a section on soft drinks. The authors’ view was unequivocal: “They don’t just fail to promote health—they actually seem to promote death.” As a longtime soda consumer, this caught my attention and motivated me to cut it out of my diet.

This isn’t a story about nutrition, though. I share this because I see an important parallel between health decisions and financial decisions. Why didn’t I open How Not to Die for so many months? Because I viewed it as an all-or-nothing proposition: Either I was going to read and accept all 600 pages of its prescriptions, or I wouldn’t open it at all. Yet, when I did open the book, I realized that it was hardly all-or-nothing.

When it comes to financial questions, I suggest looking at it the same way. Don’t worry about answering every question and solving every problem. What’s most important is to avoid becoming paralyzed by indecision. A single step in the right direction is far more valuable than standing still. Below are three common dilemmas that often lead to financial indecision—and how to escape the quicksand:

1. I’ve heard that market timing is a bad idea, but I’m worried about the stock market. What should I do?

Virtually all academic studies agree that market timing is a bad idea. That’s because it’s impossible to predict the myriad political and economic events that can impact the market. But if you’re feeling stuck because you don’t know which way the market is going, there are lots of strategies you can employ.

One is dollar-cost averaging. Suppose you want to buy $10,000 of stocks. With a dollar-cost averaging approach, you might buy $1,000 each month for ten months. This doesn’t guarantee a better result. But it can help minimize regret and may be better than waiting forever on the sidelines.

Another approach is to use decision rules. For example, you might decide to buy more stocks only if the market drops below a specific level. Or, if you have stock options, you might decide to sell a specific number of additional shares only when the price reaches a certain level. These kinds of rules are great because they replace emotion with a mechanical process, ensuring that you follow through.

A third approach, if you can’t ignore your gut feel about the market, is to split the difference and do a small amount of market timing. Cliff Asness, a well-regarded fund manager, refers to this as “sinning a little.” If you time the market with a slice of your portfolio, it might help or it might hurt. The important point: It doesn’t need to be an all-or-nothing decision—which could be extremely damaging.

2. I’m unhappy in my job and want to make a move, but I have a family and don’t want to do something rash.

In his book Life Is a Startup, University of Southern California professor Noam Wasserman offers a useful framework for making sound career decisions. Borrowing from his research on startup companies and their founders, Wasserman points out that the most successful career moves result when you combine “the passion of the evangelist with the clear thinking of the analyst.”

In other words, follow your heart, but look before you leap—really look. To do this, Wasserman advises “staging” your dreams. Dip in a toe before jumping headlong. As Wasserman puts it, try to find ways to “date” potential opportunities before you commit. This will allow you to avoid getting boxed in by all-or-nothing decisions.

3. My company offers a Roth 401(k). It seems appealing, but my tax rate is very high right now. What should I do?

As I have pointed out in the past, the Roth question hinges largely on a relatively simple tax question: Will your tax rate in retirement be higher or lower? If you expect it to be lower, which is often the case, a Roth likely won’t make sense. But there’s a big wrinkle: No one knows what Congress will do with tax rates. With the trajectory of government debt, it’s conceivable that rates might have to go higher within our lifetimes.

If that were to occur, your tax rate could end up higher in retirement, making Roth contributions appealing, even if you’re in a high tax bracket today. My recommendation: Once again, don’t view this as an all-or-nothing decision and don’t view it as permanent. If you want to contribute to a Roth 401(k), you might do so with half your savings—and then mark your calendar to reevaluate the decision each year.

Adam M. Grossman’s previous articles include Pushing PricesCounting Down and Deadly Serious. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.

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