Begging to Differ

Jonathan Clements

DON’T ASSUME YOUR PATH up the mountain is one that everybody else should also follow.

I don’t budget, I earmark 80% of my retirement savings for stocks and I’m currently well above that level, I don’t have a separate emergency fund, I expect to live comfortably in retirement on half of what I currently earn, I plan to delay Social Security until age 70 and my stock market money is entirely in index funds, with roughly half allocated to foreign shares.

Should you blindly mimic what I do? Absolutely not.

It’s called personal finance for a reason: Everyone’s approach to managing money should reflect their personal goals, circumstances and emotional makeup. Yes, it’s interesting to get a glimpse into the financial life of others—a glimpse that’s regularly offered by HumbleDollar’s articles and by readers’ comments. Those glimpses give us a chance to reassess what we do and why, and we might pick up some useful ideas that’ll help us to better manage our money.

But make no mistake: When it comes to handling money, nobody has a monopoly on truth. Yes, logic and evidence favor certain courses of action, such as buying stocks if you have a long time horizon, holding down investment costs, diversifying, indexing, saving diligently, insuring against big financial risks and so on. But in the end, each of us has to tailor such advice to our individual financial life.

That’s why I grow concerned whenever I see folks insisting that their approach is not just right for them, but right for everybody else. Where does that unwavering conviction come from? Often, it seems to rest on one or more of the following six arguments:

1. “You should do this—because it’s what I did.” I see this phenomenon all the time. Those who claimed Social Security early insist it’s wrong to delay—and those who claimed late believe it’s wrong to claim early. Ditto for those who do or don’t budget, or do or don’t own individual stocks, or do or don’t have long-term-care insurance.

I view this as a form of anchoring. Many folks find it hard to set aside what they’ve done or currently do, and imagine that a different path might work just fine for others. I don’t budget and never have. But if others find it useful or comforting, what’s the harm? I avoid actively managed funds and individual stocks. But if others actively manage their portfolio, their returns are okay and it makes them more tenacious investors, who am I to object?

Want to know what really impresses me? When I read about folks who took one course of action—and now concede they were wrong. It’s easy to protect our psyche by pounding our chest and proclaiming we’re right. It’s much harder to humbly concede our error.

2. “It worked well for me.” I’ve never had a separate emergency fund. Early on, sitting on a big pile of cash simply didn’t seem like a possibility when I was raising a family on a junior reporter’s salary, while trying to save for retirement, the kids’ college and a house down payment.

As it turns out, my nonexistent emergency fund was never a problem. But that doesn’t mean it was prudent. It means I was lucky. To use the term popularized by professional poker player and author Annie Duke, we shouldn’t engage in “resulting”—imagining a decision was good simply because it turned out well.

Today, I still don’t have a separate emergency fund. But at this juncture, I think that’s just fine. I have ample money in my retirement portfolio and could easily use some of those dollars to cover an emergency expense without imperiling my financial future, so I see no need to keep a separate stash of rainy-day money. But that doesn’t mean my failure to have an emergency fund in my 20s and 30s was a smart strategy.

3. “I heard this incredible story.” I think the case for indexing is unassailable. But if your goal is to appeal to the heart not the head, you’ll likely fare far better by sharing that anecdote about your neighbors, who claim to have beaten the stock market averages every year with ease.

Make no mistake: Stories are more powerful than logic or statistics. But I would also encourage you to be skeptical of the stories you hear. Take those market-beating neighbors. Are they including all their investments in their calculation, or are they conveniently ignoring the duds that they’ve since sold? How much risk did they take? What benchmark are they comparing themselves to? Are they counting the savings they added to their nest egg as part of their portfolio’s gain? Have they even made a calculation and have they done it properly—or do they simply believe they’ve beaten the market because their wealth has grown over time?

4. “But what if that idiot wins the next election?” I’ve heard of folks who bailed out of stocks because Barack Obama won the presidency—and others who fled stocks because Donald Trump was elected. More recently, investors are getting hot and bothered over whether a money manager does or doesn’t use environmental, social and governance criteria.

I’m skeptical of any financial advice that comes with the taint of heated political rhetoric. I think our political views should play almost no role in the investments we own. One exception: Over the years, I’ve grown sympathetic with those who avoid investing in countries with authoritarian regimes, notably China, where property rights are far less secure.

5. “Everybody’s doing it.” We’re social creatures whose spending and investing is heavily influenced by others, including our parents, neighbors, colleagues and—increasingly these days—those we follow on social media.

Indeed, the internet in general, and social media in particular, seem to be megaphones that promote all kinds of dubious information and bad behavior. How many people have made financial decisions in recent years that they now regret because of the online frenzy generated over meme stocks, cryptocurrencies, special purpose acquisition companies, real estate and even Series I savings bonds?

6. “Trust me, I’m successful.” Sure, you’ve led a life marked by career accomplishments. But that doesn’t automatically make you a whiz at managing money. Think of this as the “doctor phenomenon.” Just because you can save lives—or started a successful small business or became CEO—doesn’t mean you can pick the next hot stock or know which way the financial markets are headed.

Yet such folks often have abundant, unjustified confidence in their own investment abilities. Worse still, others often hang on their financial pronouncements. This is not a good idea. I once had the chance to view the feverish trading activity of a retired CEO. It was almost as if his goal was to violate the wash-sale rule. The number of buys and sells was impressive. The results weren’t.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

Do you enjoy HumbleDollar? Please support our work with a donation. Want to receive daily email alerts about new articles? Click here. How about getting our twice-weekly newsletter? Sign up now.

Notify of
Oldest Most Voted
Inline Feedbacks
View all comments

Free Newsletter