Financial Superpowers

Jonathan Clements

THERE ARE ALL KINDS of financial talents that seem desirable. Who wouldn’t want a knack for finding undervalued stocks, identifying star fund managers, and figuring out which way the stock and bond markets are headed? The problem: While some folks may briefly appear to possess these talents, it usually turns out that their apparent prescience was nothing more than dumb luck.

Where does that leave us? Forget the obvious but elusive financial superpowers, and focus on those that—with a little work—are available to all of us. Here are seven advantages that I think we should all strive to cultivate.

1. Greater humility. The larger financial world, as well as our own financial life, are rife with uncertainty. Think about all the unknowns: market meltdowns, job losses, ill-health, home repairs, family tragedies. The list goes on and on.

There’s a reason this site is called HumbleDollar. We should humbly accept that there’s much about the financial world that’s unknowable and that we can’t control. Instead, we should focus our energies on those aspects of our financial life where we do indeed call the shots—things like how much we save and spend, what insurance we carry, how much we pay in investment costs, our portfolio’s tax bill and how much investment risk we take. No, none of these is as exciting as hunting for the next hot stock. But they’re much surer routes to improving our financial standing.

2. Lower fixed costs. Our goal shouldn’t be to spend as little as possible. Rather, we should seek to spend on things we truly care about, while still setting aside enough for the future. But if we’re to meet those twin goals, something else has to give. My suggestion: Keep a close eye on your fixed living costs. We’re talking about things like mortgage or rent, car costs, utilities, insurance premiums, and recurring monthly payments for everything from gym memberships to cable TV to music streaming.

The lower your fixed living costs, the easier the rest of your financial life will be. You’ll have more for discretionary “fun” spending, for savings, and for giving both to charity and to loved ones. In addition, if your fixed monthly costs are low, you’ll be in better shape if your financial life takes a big hit, such as losing your job or needing to pay for a major home repair.

3. Less expensive wants. Where will you direct your discretionary dollars? There are all kinds of possible uses for our spare time and money: shopping for clothes, buying art, hobbies, vacations, concerts, eating out, upgrading the car, sporting events, remodeling the house.

What we choose will reflect our personal preferences and, as such, there are no bad choices, provided we can afford the purchases in question. Still, if we favor using our spare time in less expensive ways—picnics, gardening, exercising, reading books from the library, writing in our journal, hanging out with friends—we’ll find it easier to save and we’ll need a far smaller nest egg for a happy retirement.

4. Longer time horizon. Why do professional money managers and Wall Street analysts focus so much on the months ahead? This isn’t a tough one to answer: Short-term performance is a big driver of Wall Street compensation, including those year-end bonuses so beloved in the financial business.

This is where everyday investors have a huge advantage. They can look beyond today’s financial worries and focus on the long term, reaping the rewards that accrue to those who hang tough with diversified, stock-heavy portfolios through thick and thin. But how long is the long term? While the answer will differ for all of us, I think many folks will discover that a huge chunk of their savings won’t be spent for many, many years.

I usually suggest retirees keep five years of portfolio withdrawals in conservative investments, which should be enough to ride out a stock market decline and reap the benefits of the subsequent rebound. But let’s be conservative and make that seven years. Using a 4% withdrawal rate, seven years of portfolio withdrawals—ignoring bond interest and stock dividends, but also ignoring inflation—would mean keeping 28% of a portfolio in conservative investments, freeing up the other 72% to potentially be invested in stocks. That would be considered an aggressive asset allocation for a retiree, and yet I’d argue it’s still prudent.

What if you’re pretty sure you won’t need a big chunk of your portfolio to pay for your own retirement, and hence you’re spending less than 4% each year? The remaining money is presumably earmarked for bequests to family and to charity—and I, for one, would allocate 100% of that money to stocks.

5. Higher risk tolerance. Even if it makes sense to allocate more of your portfolio to stocks, are you comfortable doing so? Again, like other attributes mentioned here, I think a higher risk tolerance is something we can cultivate. By studying market history, and by recalling the market turmoil we’ve personally witnessed and all the fears that were never realized, we may come to develop a higher tolerance for risk.

To be sure, as some have argued, we shouldn’t necessarily act on this higher risk tolerance, even if our financial situation allows it. At issue is the all-important notion of enough. As Bill Bernstein has said, “When you’ve won the game, stop playing with the money you really need.”

I think there’s a good argument for easing off the risk pedal once we’re retired and being a tad more cautious—perhaps, as mentioned above, setting aside seven years of portfolio withdrawals in short-term bonds, rather than five. But I’m not willing to take this notion of “having won the game” to its logical conclusion by, say, banking everything on income annuities and inflation-indexed Treasury bonds, so every spending dollar needed in retirement is guaranteed to be there.

6. Greater self-awareness. The more we understand ourselves, the better the financial decisions we’ll make. This isn’t just about knowing our risk tolerance. It’s also about grasping our greatest hopes and fears, thinking about how our upbringing continues to influence us, understanding what money means to us, and pondering how we can best use money to boost our happiness.

This self-exploration never ends—because our attitudes change with experience and with age. For instance, those who are younger often show more interest in acquiring possessions. Partly, it’s because their time horizon is longer and thus they have more time to enjoy whatever items they buy. But it’s also because these folks haven’t yet suffered the countless cycles of thrill and disappointment that accompany the many possessions we purchase. Instead, that wisdom has to be learned—and it helps explain why those who are older have a greater interest in buying experiences rather than possessions.

7. More concern for tomorrow. Our lives are a constant tradeoff between our current self’s whiny demands and the often-ignored needs of our future self. Spend today or save for tomorrow? That’s the classic financial tradeoff.

But there are also tradeoffs in other areas of our life. Shall we have the cheeseburger and fries today, knowing the scale won’t be so kind in the morning? Shall we let work slide this week, knowing next week could be a nightmare? Shall we skip exercising today, knowing tomorrow’s health won’t be quite as good?

I realize that, if we crave a greater sense of control over our life, sacrificing today for a better tomorrow can become a way of life—and a rather dull one, at that. Still, despite that risk, I’d argue that an awareness of tomorrow’s needs is a financial superpower and, indeed, it may be the most important one.

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

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