FREE NEWSLETTER
ON DEC. 31, 1759, Arthur Guinness signed a lease to take over a defunct brewery in Dublin. What was unusual was the lease’s term: 9,000 years.
It didn’t take long before Guinness and his landlord both realized they’d made a mistake and agreed to end the lease. Guinness needed more space, and the landlord realized he’d neglected to account for inflation. The rent was fixed at £45 annually for the entire 9,000 years.
The Guinness case is notable because it’s so extreme, but it illustrates an important point: In making financial decisions, we should always look for ways to maintain flexibility. What does this mean in practice?
When it comes to your portfolio, I’d start by asking two questions: Are you diversified between asset classes, and are you diversified within asset classes? There are other considerations, but these two decisions—according to the data—generally have the most impact on both risk and return.
In choosing among asset classes, what’s most important is to look for investments that, ideally, would not all decline together during a downturn. The two asset classes I recommend are stocks and bonds, because they often move in opposite directions. But those aren’t the only options. Real estate, for example, could be very helpful.
Decisions within each asset class are less important but nonetheless deserve attention and can make a portfolio more flexible. On the stock side, I almost always recommend index funds, but you might also consider an allocation to one of the newer, lower-cost direct indexing services. These indexing services aren’t appropriate for everyone, but they can deliver added flexibility from a tax perspective.
On the bond side, I’d avoid total-market funds. While they are diversified, their duration exposes them to risk. In 2022, these funds lost 13%. Instead, I’d opt for a broad mix of funds. Most important, I’d include one or more short-term funds in the mix. In 2022, most short-term funds lost less than 5%. For additional flexibility, you might also add some individual bonds to help insulate the value of your bond holdings should rates rise or fall.
Looking beyond your portfolio, how else can you add flexibility to your finances?
Tracking spending is no one’s favorite activity, and the process of categorizing transactions can be tedious. One way to simplify this process is to categorize spending into a few major categories. I believe what’s most important is to see how your spending breaks down between fixed costs and discretionary expenses. Doing this will tell you how much flexibility you have to reduce spending, if need be, in future years and could provide valuable peace of mind.
How might you achieve financial flexibility when buying a home? Suppose you can make a down payment that’s larger than the required minimum. If you make a larger down payment, you’ll have less in the bank but will have smaller monthly payments. On the other hand, if you make a smaller down payment, then you’ll have more in the bank but have larger ongoing payments. Each option provides some flexibility. Which is better? In my view, making a larger down payment is the better bet, because lower payments could provide welcomed flexibility down the road.
You can also incorporate flexibility into your charitable plans. If you employ a donor-advised fund (DAF), you can front-load multiple years of contributions during years when your tax rate is high. By doing so you could then use the DAF as a charitable piggybank from which to make contributions over any number of subsequent years.
What about insurance? If you have children and are looking to buy life insurance, don’t feel you need to choose just one policy. Recognizing that your need for insurance will likely decline over time—as your savings grow, your children finish school and your mortgage balance shrinks—you might set up a ladder of sorts, with more coverage during your early career years. Or look for a policy that allows you to reduce the coverage level over time.
Buying a new car? When you do the math, leasing generally isn’t the best option. But that doesn’t account for the non-quantitative aspects of the decision. Those who prefer leasing cars cite several benefits. Leasing always allows you to drive a new car with the latest safety features. New cars are known to be more reliable and require less time in the shop. Leasing can also make sense if you’re considering an electric car, where the technology—and thus the resale value—can quickly change. By leasing, this risk becomes a non-issue. In short, leasing might not be the “right” answer according to the calculator, but it may provide the most flexibility.
Maintaining flexibility can be valuable even when it doesn’t seem necessary. Consider the universities that have faced funding pressure from the federal government this year. Some of them have been forced to conduct fire sales of their illiquid private equity holdings. There’s no way these universities could have predicted this funding crisis. But if they allocated more to standard, publicly traded investments when structuring their portfolios, they would have a buffer against any potential unknowns.
It’s natural to want to make logical financial decisions. But because the future is full of unknowns, it’s important to avoid being too strictly wedded to the math. I believe there are two answers to every financial question: what the numbers say and your feelings about it. Both answers deserve an equal vote when making a financial decision, and you shouldn’t worry if you prioritize flexibility over what is deemed “optimal.”
In my town, the big political debate these days is whether to allow overnight parking. So, things are rather tame. Nonetheless if you were to visit the mayor’s office, you’d find that behind her desk is a door leading to a narrow staircase. It’s an escape hatch, allowing the mayor to exit directly from her second-floor office to an out-of-the-way door at the back of the building. I’m not sure that any mayor has ever had to use this exit, but I imagine there have been times when they’ve been grateful to know it was there.
The bottom line: Finding ways to maintain flexibility, even when the risks don’t seem high, can pay dividends in more ways than one.
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 X @AdamMGrossman and check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Jack,
I believe the reason Dublin Guinness is the best is because the unique microbiome of the brewery. The microbiome can’t be replicated even thought the recipe and brewing process may be identical in other locations. Perhaps Guinness does not travel well either because it’s not as good in Scotland as it is Dublin, however I’m not sure the Guinness in Scotland comes from Dublin.
“I believe there are two answers to every financial question: what the numbers say and your feelings about it. Both answers deserve an equal vote when making a financial decision, and you shouldn’t worry if you prioritize flexibility over what is deemed “optimal.”
The challenge with this is how do you compare a number to a feeling? If you are looking at several options, and you know the cost of each option, or the value of each, you can use your feelings more effectively. For example, if Car A costs $40K and Car B costs $50K, but you love Car B way more and can afford it, go with your feelings. But if Car B costs $200k, you may want to think a little more about the numbers, even if you love Car B.
Another real life example I and many colleagues experienced was the choice between taking a monthly pension or a lump sum. Luckily, the pension information provided the equivalent present value of each of our options. To me, the monthly benefit was the best value and that’s what I said to my colleagues.
A few years later, interest rates had change enough that the decision for current retirees wasn’t so clear. In that timeframe my personal preference for a secure monthly annuity was now not the best choice.
Regarding flexibility, owning treasuries instead of CDs provides the flexibility of selling. As long as rates don’t go up, the sale price will be better than the penalty of canceling a CD.
On life insurance: Something I notice most people don’t account for is inflation. If you take out a $500,000 policy its purchasing power is $276,577 twenty years later at 3% average annual inflation (it could be better or worse).
Thanks Adam, I really like your articles.
I always appreciate the history lessons that come with your articles. Thanks!
I wonder why Guinness tastes better when drinking it in Ireland than in the US. Ambience? Or do they treat it differently before shipping to US? Love the story and it sounds like your town is a great place to live!
I agree. Perhaps fresher?
That 9,000 year lease is on display in the floor of the Guinness Storehouse in Dublin.
We visited there years ago, and I missed it. Must have had too many glasses of Guinness! And, it may well be fresher.
Keep those great articles coming. Congrats on another winner.
Great article. I propose one addition: when deciding between a 15-year mortgage and a 30-year mortgage, opt for the 30-year and make the 15-year payments. Yes, you will pay a little more interest, but you have some real flexibility.
Also good to put 20% down, if possible, to avoid the monthly private mortgage insurance (PMI).
I believe there are two answers to every financial question: what the numbers say and your feelings about it. Both answers deserve an equal vote…. Great point, and one that helps explain why there are so many diverse views and financial approaches in the HumbleDollar community.
It also helps to explain why so many people who should know betterstill make poor financial decisions, based on emotions. I don’t think, “what the numbers say and your feelings about it,” deserve equal weighting.
The variation in how people weight (or think they weight) the two considerations adds to the diversity of perspectives. How you evaluate the decisions others are making is necessarily affected by your own conviction of what the “weighting” should be.
Great common sense article. Common sense is more rare than anticipated. Steady wins the race in most cases, so go with the odds for success.
I like the image of a back door. The alternative is having to fight your way out. My wife and I did that with debt. We’re doing it now with people and things that drain our time. The list of forever commitments is important, but short.
Great article Adam. 100% agree. When investing is more important to stay reasonable than purely rational.