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Ignoring the Rules

Joe Kesler

ONE HALLOWEEN, some of my teenage buddies and I were having a great time throwing water balloons at trick-or-treaters. It was a lot of fun—until we got caught. After getting hauled down to the police station for a lecture, and then receiving another one when I got home, I’ve been pretty much on the straight and narrow ever since, including when it comes to money.

Over the years, I’ve discovered various tried-and-true rules of investing and those have been the keys to my success. In my personal Investor Hall of Fame, I’d include Warren Buffett for his lessons on patience and the value of letting compounding work to your benefit. I’d also include Burton Malkiel for the classic he authored, A Random Walk Down Wall Street. It taught me that the markets were so efficient that I’d be better off buying index funds than individual stocks. And, of course, there would be a place for Vanguard Group founder John Bogle, who made it possible to follow Malkiel’s advice by creating the low-cost index fund. These wise sages, along with others, provided me with the rules needed to succeed.

But despite my reverence for time-tested wisdom, I give myself a little wiggle room. Most of us can’t always invest like robots. Sometimes, we want to do something with our money that doesn’t follow the established rules for investment success. A popular compromise: Set up a “fun money” account. I allow myself to play with 5% or 10% of my portfolio. Here are four examples of how I’ve had fun by not following the rules.

1. I’m a little embarrassed to admit that I have a position in bitcoin. Crazy? Yes, I know. Buffett calls it “rat poison squared.” But even Buffett gets some things wrong. It isn’t unusual in the history of innovation to see resistance to new ideas.

For instance, if you’re drinking coffee as you read this, it’s a privilege that was once prohibited. In 1675, King Charles II banned the sale of coffee in England because coffeehouses were deemed to have “produced very evil and dangerous effects.” In other words, people sat around drinking coffee and critiquing the king.

In fact, from refrigeration to margarine to recorded music, innovation has a history of being resisted. Perhaps it’s predictable that a challenge to our understanding of money would also meet with cat calls.

We don’t yet know whether cryptocurrencies will have stamina and change how we think about money. But for this banker, it’s an invigorating debate—one that challenges me to set aside my preconceived notions about what constitutes money. I enjoy having some “skin in the game,” if only to focus my attention as the debate rages. And—who knows—maybe bitcoin will go to $1 million.

2. Some purists will think I’ve sinned because I own some individual stocks. Over the long term, the odds of an individual investor beating the market by picking stocks are very low. Even so, I think some good can come from investing in individual stocks.

It’s important to think of stocks not as blips on a computer screen, but as ownership of a company, and investing in individual stocks can help with that. I bought my kids Nike and Apple stock when they were little. I wanted to teach them that they owned a company that made things they used. Infecting my kids early on with pride in stock ownership made investors out of them as adults.

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I also love owning Berkshire Hathaway. One of its holdings is BNSF, a railroad that runs through Montana. When I see a BNSF train pulling a long line of railcars, I smile, knowing it’s making me money. And I always remember I own Dairy Queen when I have ice cream. It adds to the enjoyment.

3. Owning whole life insurance is harshly criticized by many, including some popular radio personalities. The argument against whole life is simple. It’s too expensive. We should buy cheap term insurance and invest the rest.

But hear me out. I’ll use one of my policies as an example. It’s a $25,000 face value policy I bought in 1985. I’ve paid $312.50 a year into it ever since. The cash value is now $30,500 and the death benefit is $54,887. I estimate the internal rate of return on the policy has been around 5.4%. Last year, the return was 5.03%. It’s from a AAA-rated mutual insurance company and the cash value only goes up. Where else could I get a risk-free, tax-free yield of 5.03% today?

I have a number of these policies yielding more than 5%. If I didn’t have them, I would be keeping emergency money in a savings account earning almost nothing. They allow me to earn a decent return and to invest more aggressively elsewhere. I’m not advocating anyone should buy whole life. But I’d argue these policies aren’t as bad a deal as some advisors suggest.

4. Perhaps the biggest financial rule I broke was taking on more than $1 million of future expenses without a clear plan to cover the cost. I’m talking about the decision my wife and I made to start a family.

According to the U.S. Department of Agriculture, the cost to raise a child through age 17 is $233,610. We had five, so that adds up to $1,168,050. I was 29 when we had the first one. Our net worth was $20,000. We didn’t look at the cost but proceeded on the assumption that if we lived frugally, worked hard and invested well, we would make it work.

Many—and probably most—families make the decision to have kids without a solid plan for how to cover the cost. That may seem financially irresponsible. But it’s a choice that most parents never regret.

Joe Kesler is the author of Smart Money with Purpose and the founder of a website with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers. Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Check out Joe’s previous articles.

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J Cp
J Cp
1 month ago

How much does it cost to raise children? How much do you have? Within a broad range of income and family size, raising children takes everything. A lot or a little rarely is it enough.

Are there any among us raised in poor families? If so, are you happy that your parents had children despite their lack of resources? How poor would a child need to be before for the later adult child to wish she had never been born?

Mr Moderate
Mr Moderate
1 month ago

I see no 🙈 huge problems in your “violations.” And the biggest dividend$ you get will be from #4.

Catherine
Catherine
1 month ago

I considered mining Bitcoin before it became tradable. Then I read about banks of Chinese programmers for hire to do mining for a person and decided against that acquisition strategy. FRBSF has a great little piece on Ben Franklin and the argument for fiat currency. If nothing else, these non-state instruments provide great entry into discussions on why we have currencies.

Joe Kesler
Joe Kesler
1 month ago
Reply to  Catherine

Good comment Catherine. One of the reasons I dipped a toe into crypto is because it leads to interesting and engaging conversations on the nature of money. It’s a fertile topic for good discussion over coffee. Thanks for the post!

R Quinn
R Quinn
1 month ago
Reply to  Joe Kesler

After I wrote my first comment this morning I got a notice I could buy Bitcoin through PayPay so I jumped in and bought 2/10,000 of of a BitCoin with my $10.00 PayPal account balance. Now I can claim full diversification… as long as I can count my gold wedding ring.

R Quinn
R Quinn
1 month ago

Don’t know a thing about Bitcoin, but I’m with you on 2,3 and 4. The stocks create dividends equal to about half my SS. The life insurance is an old GUL I built up for my wife and and converted to paid up policies. And number four? We’ll we had four children in five years and never a discussion about money or that after the first child my wife would stop work outside the home and we would live on my income. It all worked out with dividends in the form of 11 grandchildren. I have to admit it was a bit stressful during the years we had one, two or three in college for ten years in a row.

Joe Kesler
Joe Kesler
1 month ago
Reply to  R Quinn

Thanks Richard. We got the last of five kids through college last month. It’s been 18 years to get them through, but I’ve got three of those dividends you mention so far. No regrets at all.

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