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Twelve Truths

Adam M. Grossman

AT LEAST ONCE A DAY, I find myself saying, “Another truism of financial planning is….” To be honest, I don’t know whether the 12 concepts below meet the strict definition of “truism,” but I’ve found them hugely helpful in navigating the world of personal finance:

1. There are always two answers to every question. There’s the mathematical answer and there’s the “how do you feel about it” answer. It’s okay—and, in fact, it’s to be expected—that these answers differ. But ideally, you want to make choices that satisfy both needs.

2. Taxes aren’t always a bad thing. Sometimes, they’re far better than the alternative. A short-term gain, for example, is always better than a loss. It may also make sense to realize a gain if you’re trying to take down the risk in your portfolio. To be sure, no one likes taxes. But zero taxes may not be a sensible goal, either.

3. There are many roads to Rome. There are lots of ways to build a successful financial plan. Some people—usually the proverbial brother-in-law—love to talk about how great they’re doing with their investments. That’s fine. Let them talk. But remember that other people don’t need to be wrong for you to be right.

4. I’m only half-joking when I say you don’t truly know someone until you’ve seen his or her tax return. Think twice before modeling other people’s financial strategies. They may not be doing exactly what you think they’re doing. The fact is, you can rarely tell what’s going on in someone else’s house from the outside.

5. Once your balance sheet is beyond a certain size, risk is optional. Imagine you’re Bill Gates. If you kept all your money under the mattress, it wouldn’t be a problem. It would erode due to inflation, but you’d still have enough for more than one lifetime. Alternatively, you could keep every dollar invested in stocks, and that wouldn’t be a problem either, because you could weather market downturns unscathed. Bill Gates is at an extreme, but as your assets grow, this dynamic will become more and more applicable—and risk will become more and more optional.

6. Risk tolerance is a moving target. By the time you’ve reached a certain age, you’ve likely experienced multiple market downturns. As a result, you might feel that you understand your tolerance for risk. But that might not be the case. You only know what it’s like to endure downturns in one phase of life. You don’t yet know what it’s like to handle a downturn at a different stage—such as when you’re retired and drawing down your portfolio. In short, risk tolerance changes as you change. It isn’t hardcoded into your DNA.

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7. All data is, by definition, backward-looking while all decisions are, by definition, forward-looking. This is a critical concept. You should view historical numbers as a guide, but don’t spend too much time trying to apply higher order math to your financial plan. In financial planning, greater precision only provides the illusion of greater accuracy. This is one of the reasons I don’t put too much stock in Monte Carlo analysis.

8. Utility is in the eye of the beholder. Economics 101 teaches that every consumer wants to “maximize utility.” I suppose that’s true, but not in the way that it’s normally presented. Utility shouldn’t be measured strictly in dollars. Don’t let anyone else—or any textbook—tell you that your choices are sub-optimal. Everyone derives happiness differently, and that’s okay.

9. None of us is average. There’s the old joke about the six-foot man who drowned in a river that was five feet deep on average. This is another reason you don’t want to worship too seriously at the altar of historical data. Long-run averages rarely align with any one person’s investing timeframe. That’s why I take sequence-of-return risk very seriously. Through no fault of our own, some of us will end up above average, while others will end up below.

10. None of us is (fully) equipped to manage investments. That’s because investing requires a split personality. As I’ve outlined in my “five minds” framework, investing requires that you simultaneously channel the minds of an optimist, a pessimist, an analyst, an economist and a psychologist. I’m an advocate for intentionally seeking out contrary opinions. If you’re a pessimist, for example, find an optimist to bounce ideas off.

11. There’s little value in kicking yourself. If you made a financial decision that didn’t work out, don’t berate yourself. To be sure, there’s value in reflecting on decisions. But nothing that happens in the world of investing provides an iron-clad guarantee of what will happen the next time.

12. Financial planning becomes easier with each passing year.  The future is, of course, full of uncertainty. How much will you earn? How much will you save? What will the market do? What about my health? What about inflation? But as each year goes by, the future moves a step closer and a little bit of that uncertainty falls away. The upshot: Don’t worry if your financial plan feels like it’s built on a large number of assumptions. It’ll get easier.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, he advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman and check out his earlier articles.

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SCao
SCao
7 months ago

Thanks for sharing. Nice insights.

CJ
CJ
7 months ago

great article, thank you. #4 is so true. #11 is my favorite pasttime some days lol

Will
Will
7 months ago

I don’t get this. Is this also a quote?

Will
Will
7 months ago

yes, another wise piece. thanks!

parkslope
parkslope
7 months ago

Buffett’s advice to the trustee of his estate is to only put 90% in low cost index funds 😊

David Powell
David Powell
7 months ago

Good piece!

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