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Teaching the Teacher

Adam M. Grossman

I RECENTLY STARTED reading Think Again, the new book by Adam Grant. Subtitled The Power of Knowing What You Don’t Know, Grant’s book got me thinking about all the ways that, over the years, conversations with clients have led me to look at things through different lenses. Below are eight such topics:

1. There’s one important financial question that stumps most everyone—for good reason. In building a financial plan, a critical input is a family’s spending rate. In financial planning classes, this is one of the first questions we’re taught to ask. But this turns out to be an exceedingly difficult question for most people to answer. Some people use software to track their spending. But more often than not, many families have largely thrown in the towel on this question. Over time, I’ve come to understand why.

It’s not that people don’t want to know this information. I think it’s because the systems that exist—whether it’s Quicken or one of the newer tools, such as Mint, Tiller and YNAB—still require a lot of manual maintenance. Even though these tools can connect to banks and download data automatically, that data still requires line-by-line review to ensure it’s all categorized correctly. That task has only gotten harder in recent years with the rise of payment apps like Venmo and Zelle.

My hope is that there are entrepreneurs in a garage somewhere working to solve this problem. In the meantime, what’s the solution? If you haven’t tried one of these newer tools, I recommend testing a few to see if one suits you. In the spirit of my comments last week—that good is better than perfect—use them as much as possible, but don’t worry if the numbers aren’t perfect. There’s value in having even a ballpark sense of your spending.

2. Investments are in the eye of the beholder. I recall once having a conversation with two colleagues. The first explained that 100% of his assets were in real estate. He felt that rental properties were easy to understand and he liked knowing that rent checks would reliably roll in each month.

The second responded that he didn’t own real estate at all. He cited the risks: What about a middle-of-the-night plumbing problem or a tenant who’s late paying rent? For those reasons, this second fellow invested all his assets in the stock market. He liked being part owner of great companies, from Apple to Amazon and many more.

In this discussion, I realized that neither was necessarily right or wrong. I always advocate diversification. But as long as an investment generally makes sense—and both stocks and real estate do—then I think it’s equally important to be comfortable with what you own.

Writing in Unconventional Success, the late David Swensen articulated this point well: “Personal preferences play a critical subjective role in portfolio decision making. Unless an investor embraces wholeheartedly a particular portfolio structure, failure awaits.” Why? Swensen explained, “Lightly held positions invite casual reversal.” In other words, if we own an investment but aren’t fully comfortable with it, we run the risk of abandoning it at an inopportune time, thus locking in a loss.

I think this is an underappreciated point—that it’s okay for personal preferences to play a meaningful role in how you invest. There are many valid ways to invest. You shouldn’t feel any need to own an asset or asset class if you aren’t fully comfortable with it.

3. Values-based investing is more important to people than the data would suggest. Look through the list of S&P 500 companies and, depending on your values, there’s bound to be more than one that doesn’t sit well with you. Look at investment industry data, though, and assets managed on the basis of ESG factors—environmental, social and governance—still represent a tiny fraction of the market. The disconnect, I think, stems from the fact that off-the-shelf ESG funds can’t be customized. They’re intended to be one-size-fits-all. That makes it hard to find a fund that’s a perfect fit for any given individual’s goals and values.

At the same time, it would require a monumental amount of research to build a portfolio from scratch. That’s why I’m excited about the trend toward direct indexing, which will give investors the ability to tailor portfolios as they see fit, ejecting stocks they don’t like and doubling up on the ones they do. These services are still maturing, but I think this is a trend worth watching. Personally, I look forward to the day when I can eject Philip Morris.

4. People worry about the market—but that’s not what they worry about most. Listen to the financial news, and there’s a lot of focus on the stock market. To be sure, the market is important. But that’s just one of the financial concerns that keep real people awake at night.

People worry about whether they’ve saved enough. They worry about debt. They worry about the crushing cost of college. They worry about the dysfunction in Washington. Maybe most of all, they worry about their health and ability to keep working. Is the stock market important? Sure. But it doesn’t deserve nearly the level of attention it receives.

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5. Real estate can be a huge wealth builder—but one formula seems to work better than others. If you want to invest in real estate, you have a lot of options: You could buy a real estate investment trust fund, invest in a private fund, or go the route of a syndicate or crowdfunding. But the approach that seems to generate the best returns, especially after taxes, is to own an individual property. As noted, it isn’t for everyone. It’s definitely more work. But in exchange for that, there are fewer intermediaries subtracting fees, leaving more for you, the investor.

6. In retirement, income seems to matter more than assets. Most people perceive annuities as overpriced and unnecessary. In many cases—maybe most—that’s a fair assessment. But something I’ve observed is that folks with more guaranteed income, such as a traditional pension, seem happier and more at ease, both before and in retirement. There’s also data showing that people with annuity-like income live longer. Does that mean you should run out and buy an annuity? No, but I do think they’re worth an unbiased look.

7. Downsizing is tricky. For many people, downsizing seems like an appealing strategy to bolster financial security after the tuition bills are paid and the kids are launched, and when retirement is on the horizon. In practice, though, I’ve observed that it’s harder than it looks. First, there are broker’s fees and moving expenses. Then there are capital gains taxes, which can be significant if you’ve been in your home a long time.

Finally, there’s the cost of buying a new place. That can be expensive if you want to stay in the vicinity of your old house. For all these reasons, it often seems like the net proceeds from downsizing are less than expected. No question, it can produce magical results in some cases. I’ve seen that. But it’s worth running the numbers if you’re considering this as part of your plan.

8. Everyone thinks about estate planning differently. Walk into an estate planner’s office, and the lawyer will show you a dozen ways to cut your estate tax bill, so your children receive a larger share. That’s the standard approach to estate planning and, in general, it’s worth whatever legal fees it costs to sidestep the federal estate tax, which stands at a hefty 40%.

But it’s also worth stepping back and asking whether this standard approach is what you want for your family. Why? Estate planning necessarily adds complexity—with new trusts, trustees and tax returns. But more important, wealth can be a burden. That might sound like a “first world problem,” but it can be a real concern. While we all want to help our children, some families feel it can be unhelpful to leave too large a sum.

Am I suggesting you disinherit your heirs? Of course not. But especially with the stock market’s gains in recent years, it might be worth revisiting your plans. Keep in mind that it doesn’t have to be an all-or-nothing decision. I’ve seen lots of creative approaches on this.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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tshort
tshort
9 months ago

Re tracking spending, I’ve been using a pretty simple spreadsheet I created a few years ago. Every 2-3 months I download a .CSV file containing my credit card and bank transactions and drop them into my sheet. Then comes the tedious part – categorizing each transaction based on a chart of accounts I’ve created.

My categories have evolved over time to reflect what I most care about knowing about. And that’s the trick to doing this. Don’t worry if you don’t have every expense categorized correctly down to the last penny. Near enough is good enough. More important to keep your eye on the ball, so to speak – be clear about what you’re trying to understand about your spending, and use the tracking as a way of learning and budgeting for the future.

Re annual income vs a large investment portfolio in retirement, I get this completely – I love “mailbox money” that just shows up every month. Unfortunately, pensions are gone for most of us, and so we have to “roll our own” income stream from our savings.

How great would it be if the US SSA decided to allow retirees to buy more social security in order to increase their monthly social security check during retirement? I’d put half my portfolio into it.

Nick M
Nick M
9 months ago

Budgeting for me is simple.
Step 1: I don’t buy junk I don’t need.
Step 2: If I do want something I don’t need, I research it thoroughly first, to ensure it isn’t poorly made junk. Few things these days make it past step 2.

DrLefty
DrLefty
9 months ago

#7. We’re empty nesters, still working, and a few years from retirement. We sold our single family home where we’d raised our kids and moved to a brand-new condo in 2019. In many ways, our timing was perfect. We’d be able to sell it for more now, but our condo would also cost more. We also were right under the $500,000 exemption for capital gains, so we didn’t have to pay any taxes on the sale. We put $200,000 down on the condo, took out a mortgage (just over 3% interest rate), put some money aside to furnish and decorate the new place, and used the rest to beef up our savings. This all felt really good when COVID hit.

I’m glad we did it while relatively young (59 then) because it was a lot of work to fix up, list, and pack up 20+ years of stuff. Now it’s done and we live in a new place with everything done and up to date and no need to worry about home improvements for years, if ever.

#6.Some would think that our new place, which means we’ll go into retirement with a mortgage, was not a good financial decision. For us, it’s fine. We will both have generous pensions and eventually Social Security, have well-funded IRAs/401Ks, and a cash cushion from the home sale. With the low interest rate, the mortgage payment will be easily manageable given our guaranteed income in retirement. We go back and forth about whether to accelerate paying it down or to just keep saving and investing.

Philip Stein
Philip Stein
9 months ago

I’d like to comment about Adam’s second point, “Investments are in the eye of the beholder.”

Adam introduces us to two colleagues. The first has 100% of his assets in real estate. He feels he understands real estate and is comfortable with his investments.

The second colleague is 100% invested in stocks. He likes the thought of being part owner in great companies and is comfortable with his investments.

Then Adam states that, while he always advocates diversification, it’s also important to be comfortable with what you own. Yes, but is such extreme portfolio concentration still a good idea?

Is the first colleague really justified in having his entire portfolio in real estate? How did he feel in 2008 when real estate values fell, or in 2020 when many tenants couldn’t pay their rent? And while it’s nice to have rent checks rolling in, considering the cost of real estate ownership, how much of that rental income goes into his pocket?

Is the second colleague justified in having 100% of his portfolio in stocks? How did he feel in 2008 and 2020 when the stock market plummeted? What will he do when he approaches retirement? Will he continue to maintain a 100% stock portfolio? No bonds?

Yes, it’s important to be comfortable with what you own, but can portfolios with such extreme concentration in one asset class be justified? Isn’t some degree of diversification in order despite your comfort level?

Investment professionals constantly remind us that we must understand our investments, but no one says we must like our investments. In fact, if we’re properly diversified, we most likely will not like all our investments. That’s taken as a good sign.

Last edited 9 months ago by Philip Stein
Nick M
Nick M
9 months ago
Reply to  Philip Stein

Most people have an investment portfolio that consists of nothing more than owning a personal residence. This investment is typically highly leveraged and necessarily undiversified. Assuming each colleague also owns a personal residence, either of them would be more diversified than the average person, either through geographic diversification, or asset class diversification.

I don’t see the need for others to meet my individual criteria for diversification, since owning anything beyond a personal residence is already more diversified than most people.

Jamie
Jamie
9 months ago

Tracking spending is tough and credit or debit cards don’t tell you SKU level information. My credit card knows I spent $100 at Target but does not know that I purchased some groceries, razor blades, clothes for my kid, and a gift card for a friend’s birthday. I have to divide the total manually and very few people want to deal with that hassle.

Olin
Olin
9 months ago

Thanks for the great article. I have a new book to read now – Think Again.

I read David Swensen’s book back when it came out and it’s been on my list to read again. Could you reference the page number of his quote you used? I think it is a powerful statement.

Olin
Olin
9 months ago
Reply to  Olin

I did find the quote in Chapter 3, the 3rd paragraph at the beginning of the chapter on page 81.

SanLouisKid
SanLouisKid
9 months ago

It looks like financial plans are like snowflakes: No two are alike. On estate planning: My wife and I have no children so we setup a trust with the idea that if we needed help at some point one of our personally selected trustee(s) could step in and help without going through a lot of legal rigmarole.

Rob Thompson
Rob Thompson
9 months ago

#1
Such an important tool if we could have it appear in an App at critical times. Our kids all run from the idea of budgeting. To help them at least have some perspective of their spending I have them take their checking account balances on the day prior to their first and second paychecks (2 pay periods per month) and average them. Then I suggest they track those values monthly throwing out abnormal, one-off, spending items. This at least gives them a trend and I’ve also found that it has become a target to beat each month

J Naman
J Naman
9 months ago

Spending, 50,000 foot view: Go to your 1040 tax return. Now you have Income figures, some of which varies, e.g. cap gains. For the same year, get Dec 31st statements for banks, brokerage, 401k, etc. Figure or read change in the BALANCE over 1 year. Income minus savings (+/-) = how much was spent. For me, I then backed out retirement contributions pre-65, job pay at 65 or whenever, Medicare premiums! and then added back income from Soc Sec + pensions. Ret. income – spending (w/out ret. contribs) gives an idea of how much trouble you might get into.

Jerry Pinkard
Jerry Pinkard
9 months ago

Great article Adam. I agree with everything you said. I am generally not that agreeable.

Ormode
Ormode
9 months ago

My comments:
1. If you pay your credit cards in full every month, and have only one account, then if is not hard to know what you spend – it’s your checking account balance at the end of the month minus your checking account balance at the beginning, minus any deposits.
6, If you are well-off, assets may be more important. You want to grow your assets while minimizing income for tax purposes. If you have millions, you can always take out $10K or $20K if you need it.
8. Getting carried away with estate planning when your assets are under $10 million can be costly. Seminar attorneys will sell you a plan worthy of Bill Gates, and you’ll spend tens of thousands of dollars on lawyers and accountants.

Newsboy
Newsboy
9 months ago

Re: Point #1: one distinct benefit of using a credit card for nominal daily HH purchases (assuming that your CC balance is paid in full each month) is that it makes tracking expenses (for us, via Quicken) so much easier. All card transactions can be setup to automatically download into Quicken at startup, and the software suggests (even autofills) an expense category to be assigned, based largely on your past purchasing habits with that merchant. Not foolproof by any means, but still big time-saver for those who are striving to play better “defense” via monthly budgeting of HH expenses.No doubt, a debit card can be used in a similar fashion, but using a card tied to my full bank balance at so many merchants each month makes me a bit worried about exposing our bank accounts to a card-skimming hack so common at point-of-sale card terminals.

R Quinn
R Quinn
9 months ago

Really enjoyed this article Adam, spot on and to the point.

Regarding #1 I’m a bit of an outlier and have gotten into many a debate. I don’t understand how families don’t know their spending rate. I can understand not know exactly what the money is spent on, but at the end of the month one should know how much, if anything, is left from net pay. Gross pay – taxes – savings = what is spent. The one flaw being living on credit card debt.

You are 100% correct in #6 I can attest to that. The piece of mind with a pension is more valuable than a million dollars in the market. I think a secure income stream in a combination of ways should be a primary goal.

#7 Well I’m the model for doing it wrong. My move from a three story house to a 2000sf condo cost me well over $100,000 and over a year of aggravation and stress. My house didn’t sell for what was expected, I had taken a mortgage to buy the condo so was under pressure to sell. The downsizing eventually worked out and the condo has increased in value recouping most of the losses, but I still wasted money.

Last edited 9 months ago by R Quinn
Nick M
Nick M
9 months ago
Reply to  R Quinn

Spending rate is irrelevant if savings rate/amount is known and automatic, and checking balance stays at a set target. I don’t let others pull money from me, and then wait to see what’s left over. Ideally nothing should be left over. I push specific amounts of money from checking to specific accounts (savings, brokerage, bill pay) and spend what’s left over. If I consistently have excess, I typically solve that by increasing my savings rate.

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