Seven Money Rules

Adam M. Grossman

I DESCRIBED A SET of ideas last year that I called truisms of financial planning. They’re concepts I’ve found helpful in navigating the world of personal finance. Below are seven more.

1. Jeff Bezos is a bad role model. So are Bill Gates, Elon Musk and pretty much every other billionaire. Of course, they’re all great geniuses, so why would I say that? The problem is how they made their money. In each case, they owned exactly one stock. It just happened to be an exceptionally good one. But that’s exactly the opposite of what works for most people most of the time. For everyone else, our best bet, according to the data, is to diversify and to avoid loading up on any one stock. We’ve known this at least since Harry Markowitz’s work in the 1950s.

I recognize, though, that diversification can be difficult. That’s been especially true over the past year, when we’ve seen some folks make small fortunes betting on individual stocks. Look to your left and look to your right, and there’s probably someone you know who’s hit the Tesla lottery. That’s great for them. Problem is, it would be hard to replicate.

To understand why, imagine that instead of Tesla, an investor had bet on Peloton, a stock that rose alongside Tesla early in the pandemic. Today, that Peloton investor wouldn’t be so happy. Its stock is down more than 80% from its high last year. The bottom line: Never mind the billionaires and the gunslinger stock-pickers. Instead, diversify. Always diversify—even when it looks like doing the opposite will be the easier road to profits.

2. When the stock market is at a high point, you can still expect it to go higher. Think back to early 2000, at the peak of the tech bubble. It looked like the market was at risk of a decline. And that’s exactly what happened.

But today, it’s much higher than it was even at its peak 22 years ago. In my view, that was to be expected. Why? While it’s impossible to know where the market will go this year or next, I think it’s safe to expect it to go higher over the long term. And I don’t say that just because that’s what’s always happened in the past. That’s not a good enough reason.

Instead, there’s a logical reason to expect stocks to rise over time. Ultimately, share prices are driven by corporate profits. And profits are driven by, among other things, population growth and gains in worker productivity.

Amazon offers a good illustration. The e-commerce giant wouldn’t be nearly as profitable—and thus its stock price wouldn’t be nearly as high—if it didn’t have as many robots staffing its fulfillment centers. Corporations, on average, experience productivity gains every year. And that’s why, if you have a long time horizon, you shouldn’t just hope stock prices go higher. Rather, you should expect them to.

3. As investors, we are all products of our environments. Writing in The Psychology of Money, author Morgan Housel makes the point that each generation of investors is shaped by the economic conditions they experienced as young adults. Those in Generation X, for example, benefited from a booming market when they got out of college. For that reason, they have a much more optimistic money mindset than those who came of age in the gloomy 1970s.

But this kind of effect isn’t just generational. The family you grew up in, and the financial experiences you’ve had yourself, also contribute to your beliefs and outlook as an investor. And that colors how we see investment decisions.

4. It’s the risks we don’t know are risks that pose the biggest risk. Most people follow the major news stories of the day, including those that we perceive as risks. As a result, and counterintuitively, the risks we all acknowledge as risks slowly begin to feel less risky. We’ve had time to adjust to them. An example is the current bout of inflation, which has been in the news for many months.

But it’s the news items that are currently below the radar that tend to have more of an impact on investment markets. If Russia invaded Ukraine tomorrow, for example, it wouldn’t be altogether surprising because we’ve been hearing about it for a while. The markets might take it in stride. But if some other military conflict came out of nowhere, the stock market would probably drop, just as it did when the coronavirus came out of nowhere two years ago.

The lesson: There are always more risks than we can see. And we can never know which ones will come to the surface or when. That’s why I abide by Howard Marks’s motto: “You can’t predict. You can prepare.”

5. Over time, “safe” investments tend to become unsafe, and “unsafe” investments tend to become safe. I’m referring here to cash and bonds, which are safe in the short term but can erode due to inflation over the long term, and to stocks, which can be unsafe in the short term but have always delivered positive returns over the long term. Neither is perfect. That’s why it’s important to hold both.

6. Tactical portfolio management is mostly a bad idea, but that doesn’t mean you can’t ever make tactical decisions. Tactical investment strategies, if you aren’t familiar with the term, require predictions and market timing—two of the easiest ways to lose money, in my experience. But that doesn’t mean there aren’t situations in which you can be tactical. Examples include when to claim Social Security, whether to execute Roth conversions and which asset classes to sell each year in retirement.

To be sure, each of those decisions involves making a prediction. But these kinds of predictions are very different from trying to guess where the stock market is going—which is nearly impossible. The fact is, you aren’t completely in the dark: Deciding whether to complete a Roth conversion, for example, requires guessing about your future tax rate—and that’s not entirely impossible to predict.

7. The market sometimes gets things right, but it can’t always see around the corner. Back in 2017, as investors anticipated a cut in the corporate tax rate, stocks rose. That was a completely logical reaction. And in 2020, when the Fed dropped interest rates, stocks also rose. That, too, was a nearly textbook response. But the market isn’t always so smart.

When the pandemic first hit, the government began printing money to issue stimulus payments. The market perceived those actions as positive, and in the short term, that was the case. But what the market couldn’t see was how the government’s actions would ultimately end up having a negative impact.

Flooding the market with new dollars, as we’ve seen, sparked inflation. And that inflation has prompted the Fed to announce its intention to raise rates again. That, in turn, has caused stocks to drop. The bottom line: Sometimes the market is right, but you can never be sure.

That is, by the way, a reason the market’s behavior in response to elections is virtually impossible to predict. There are just too many variables and too many unknowns. When it comes to the stock market, it’s impossible to know whether any given event will bring out Dr. Jekyll or Mr. Hyde.

What’s the best course of action for investors in an environment like this? Again, you can’t predict, but you can prepare.

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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