Subject to Revision

Sanjib Saha

DURING MY SCHOOL days growing up in India, my exposure to English literature was confined to textbooks that reprinted essays and short stories, or portions thereof. One of them was a humorous piece by Stephen Leacock from his book Winnowed Wisdom.

The excerpt was titled “Old Proverbs Made New” and it seemed funny even to a middle-schooler with a limited grasp of the English language. It argued, with examples, that proverbs get outdated and need to be rewritten. It recently dawned on me that Leacock’s contention also applies to personal finance. Here are eight popular sayings, along with my tweaks:

1. Hard work never hurt anyone. Yes, it does. In fact, successful investing requires so little effort that laziness is almost a virtue. Working too hard at investing can do more harm than good to our long-term performance.

For instance, we might try hard to time the market, only to find that it doesn’t really work. We might expend too much effort finding the next highflying stock, only to watch our hard-earned money slip away. We might burn midnight oil overdiversifying our investments, only to end up with an unruly, complicated mess. On the other hand, a simple portfolio, consisting of a few low-cost diversified funds, needs nothing more than occasional rebalancing. Hard work can hurt investment results.

2. Proof of the pudding is in the eating. Intuitively, this sounds right, doesn’t it? The final result should be the only way to judge something’s quality. This is true for cases where there’s little room for uncertainty. It doesn’t, however, apply to financial and investment decisions. Why not? Because luck and randomness contribute to the outcome. It’s difficult to separate luck from skill.

In her bestselling book Thinking in Bets, Annie Duke explains that the measure of a great decision isn’t whether the eventual outcome is great. Instead, it’s about the process and thinking behind the decision. A great decision increases the odds of a great outcome but doesn’t guarantee it. The proof of the pudding is in the making.

3. Slow and steady wins the race. I’ve always loved this lesson from Aesop’s fable. I try to practice it whenever I can. The slow-and-steady mantra works equally well in investments and financial success. Why, then, am I complaining?

My objection is to the part about “winning the race.” Our financial life is not a competition. There’s nothing to win and nobody else to beat. It’s about getting there and enjoying the journey along the way. Slow and steady enjoys the race.

4. Curiosity killed the cat. I couldn’t disagree more. Whether we manage our own investments, or let our friendly financial advisor do it for us, or blindly assume a family member is making prudent money decisions on our behalf, curiosity can be our best defense against nasty surprises.

How? Curiosity raises awareness, busts assumptions and reveals blind spots. Unless we’re curious, we may never know for sure if the family member is making good financial choices. We may overlook the hidden fees or risks associated with the investment and insurance products we bought. We may not question whether the advisor’s compensation model is the best one for us. Curiosity saves the cat’s wallet.

5. A penny saved is a penny earned. Lowering our living costs by a penny may indeed be the same as earning a penny more, assuming we ignore the pesky issue of income taxes. But what if we actually save that penny, so we can spend it at some point in the future?  That penny saved is the same as earning the future value of that penny, not its face value. Invest it wisely and we could end up with more than a penny. A penny saved beats a penny earned.

6. A bird in the hand is worth two in the bush. Not in finance and investments. We’re often better served by letting the bird in hand go and patiently awaiting a superior reward in the future. Take Social Security. The most popular age for claiming Social Security is 62. While some need to claim early because they have no other financial choice, most people are better off waiting until age 70. In reality, alas, very few people wait. They give up higher lifetime guaranteed inflation-adjusted income to grab whatever is available now. The “bird in hand” mentality proves unwise.

Similarly, I’ve seen folks hesitate to contribute to a workplace retirement account, simply because they have to wait a long time before they can withdraw the money without penalty. They’d much rather pay taxes now and get their hands on the cash. A bird in the hand leaves many in the bush.

7. There’s no free lunch. Evidently, whoever coined this popular adage overlooked personal finance. No, I’m not talking about the dubious free meal investment seminars that regulators caution us against. I’m talking about genuinely free lunches.

Looking to reduce your investment portfolio’s risk? Try combining investments that are loosely or negatively correlated with one another. The overall risk of a diversified portfolio will be less than the weighted average risk of its individual constituents. The reduced volatility is your free lunch.

Can’t afford to make 401(k) contributions? At least put in enough to get the employer’s match. Even if you withdraw after vesting and pay a 10% penalty, you’ll still retain the remainder of your employer’s contribution—another free lunch. Trying to build a small emergency fund from a meager paycheck? If you’re eligible, stash dollars in a Roth IRA. You can take back the money at any time, while leaving open the option of tax-free growth. In investing, there is such a thing as a free lunch.

8. A little knowledge is a dangerous thing. Expertise and specialized training may be necessary in many situations, but not always. With a little knowledge and initiative, we can do many things ourselves.

Not convinced? Consider our physical health. Elementary knowledge—eating balanced meals, avoiding junk food, staying physically active and so on—goes a long way toward a healthy lifestyle. We don’t need to be doctors or nutritionists to lead a healthy life.

The ingredients of emotional well-being are also simple: Show gratitude and care, count blessings, nurture friendships and so on. A degree in psychology is missing from this list. Likewise, we don’t need a PhD in finance to be successful with money. Things like living within our means, keeping costs low and investing for the long term are the necessary and sufficient ingredients. A little knowledge can be a powerful thing.

Sanjib Saha is a software engineer by profession, but he’s now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is passionate about raising financial literacy and enjoys helping others with their finances. Check out his earlier articles.

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