IT’S HUMAN NATURE to be impressed by things that sound sophisticated or seem complex. In the world of personal finance, this certainly applies to the planning tool known as Monte Carlo analysis.
Its roots go back to the 1940s, when it was developed by Stanislaw Ulam, a physicist working on the Manhattan Project. Today, it’s a popular way to assess the strength of a proposed retirement plan. If you’ve seen presentations indicating that a financial plan has a particular probability of success,
ONE WINTER DAY IN 2016, I jotted down a few comments about the financial markets and emailed them to a group of clients. I received a few responses—some of them positive—so I did the same thing the following week, and I’ve continued that practice every week since.
For better or worse, when it comes to investment markets, there’s always something new to discuss. But it can also be helpful to pause and revisit key investment principles from time to time.
IS THE STOCK MARKET headed for a sea change? That’s the argument money manager and author Howard Marks makes in his most recent memo.
The sea change Marks is referring to: For four decades, the federal funds rate declined steadily—from a peak of 20% in 1980 to 0% in 2020. The result, Marks argues, was a steady tailwind for the stock market.
In January 1980, the S&P 500 index stood at 108. At its peak early last year,
LAST WEEK, I TALKED about Carveth Read, the English philosopher who’s famous for saying, “It is better to be vaguely right than exactly wrong.” This, in my view, is one of the most important ideas in personal finance.
My focus last week was on the “vaguely right” part of Read’s statement. But what about the second part—the importance of not being “exactly wrong”? Below are seven situations in which trying to be exactly right might,
ONE OF THE MOST important ideas in personal finance comes not from a financial expert but from a 20th century English philosopher named Carveth Read. “It is better to be vaguely right,” he wrote, “than exactly wrong.”
Why is this idea important? It gets to the heart of why financial planning can be so tricky. For starters, few people—if any—can claim to be perfectly rational when it comes to money decisions. But more to the point,
I’M NOT BIG ON MAKING New Year’s resolutions. Still, January is a good time to conduct some financial housekeeping. Below are 10 ideas to consider as the calendar turns over.
1. Portfolio cleanup. I sometimes feel like a broken record when I talk about the disadvantages of actively managed mutual funds. Among other issues, they tend to underperform and are tax-inefficient. But here’s the challenge: Even after factoring in 2022’s decline, the S&P 500 has risen more than 600% since 2009’s market bottom.
IN THE INVESTMENT world, every year is unique. This year certainly has been.
But in some ways, every year is also the same. The specific events change, but many of the underlying themes and challenges don’t change a whole lot. As 2022 winds down, it’s a good time to take a closer look at six of those themes, as well as the steps investors might take to navigate them when, invariably, they present themselves again in 2023.
IN BEHAVIORAL FINANCE, there’s an important concept that doesn’t get a lot of attention: It’s called temporal discounting. The idea is that we view our current and future selves, to some degree, as different people—and there’s a tendency to discount the needs of the “other” person. It’s an interesting idea because, even for the most diligent planners and savers, there’s an inherent tension between the financial needs of today and those of tomorrow.
Take the “latte factor,” which argues that a young person could accumulate nearly $1 million in savings simply by forgoing a daily coffee and muffin.
IN A TYPICAL YEAR, the bond market doesn’t attract much interest. That’s by design. The role of bonds in a portfolio is to serve as a bulwark against the unpredictability of stocks. They’re supposed to be boring.
All that changed this year. Thanks to rising interest rates, the most common total bond market index, the Bloomberg Aggregate, has lost about 11%. To put that in perspective, this index has delivered a negative return in only three of the past 25 years.
PERSONAL FINANCE books don’t exactly rank as the most sought-after holiday gifts. Still, if there’s a money nerd in your life—or someone who aspires to be one—below are 10 personal finance book recommendations.
Why Does the Stock Market Go Up? by Brian Feroldi. This book seeks to answer 60 of the most commonly asked questions in personal finance. In so doing, it demystifies many of the concepts, terms and acronyms that we often hear but may not fully understand.
WHEN ROSS PEROT RAN for president in 1992, a pillar of his campaign was tax reform. Federal tax rules, he pointed out, had grown to more than 80,000 pages. His proposal: Start over and replace everything with a simple flat tax.
Perot’s campaign for tax reform didn’t make much progress, but many can sympathize with his frustration. Because of the complexity of tax rules, financial planning often ends up feeling like the children’s game Operation—with penalties for even the slightest misstep and confusion around every corner.
A UNIVERSAL TRUTH about market bubbles is that they’re masters of disguise. Each new bubble appears different enough, at least on the surface, to reel in unsuspecting investors. While bubbles are almost as old as the market itself, the latest example—centered around the cryptocurrency exchange FTX—is particularly impressive. At this point, no one is 100% sure what happened, but this is what we know so far.
Back in 2017, a 25-year-old MIT graduate named Sam Bankman-Fried started a hedge fund to trade cryptocurrencies.
THERE ARE USUALLY TWO answers to every personal-finance question: There’s what the calculator says—and then there’s how you feel about it. What does that mean in practice? Let’s look at an example.
Suppose you’re considering when to claim Social Security. Many retirees struggle with this question. On the one hand, the government offers a strong incentive to wait: For each year you forgo Social Security—up to age 70—your future benefit will grow by some 8%.
I DON’T ENVY THE FOLKS in Washington. Last year, many accused Federal Reserve policymakers of being asleep at the wheel as they downplayed the risk of rising inflation. This year, of course, it’s been the opposite: The Fed has been in overdrive, raising interest rates aggressively. So far, the Fed has pushed through six increases in a row, totaling 3.75 percentage points. Many are now criticizing the Fed for moving too quickly.
This is in contrast to the challenge the Fed had been dealing with before COVID.
I’VE TALKED IN EARLIER articles about asset-liability matching. It’s a concept popular with insurance companies to manage investment risk. It’s a very formal approach and not one I would expect an individual investor to follow too literally. But it’s a notion that, in general, can help individuals make asset allocation decisions.
In his book, The Outsiders, William Thorndike highlights another well-known principle in corporate finance that can also be applied to personal finance: It’s called capital allocation.