THERE’S SOMETHING compelling about numbered lists. One day, maybe we’ll even draw up a list of the “Top 10 Reasons Lists Are So Popular.” But for now, you’ll have to make do with the lists below.
31 Rules of the Road
45 Steps to Success
Where Money Grows Up
10 Questions to Ask
The Right Portfolio
Say This to Them
51 Things Not to Do
50 Shades of Risk
10 Key Decisions
Wisdom That Isn’t Wise
Take It to the Limit
Jonathan on Happiness
Connecting the Dots
A Happier Life
Did I Say That?
Land vs. dwelling. As you contemplate the potential return from owning a home, it’s helpful to distinguish the dwelling from the land underneath it. You can be fairly confident the land will appreciate over time. By contrast, the dwelling itself will deteriorate, requiring regular maintenance and occasional upgrades if the property is to keep up with the broader housing market. The dwelling, however, also provides you with shelter—which is the key reason to own residential real estate.
Longevity risk. This is the danger that you will live longer than you’re financially prepared for, forcing you to cut back spending or take other drastic financial steps, as your savings start to dwindle.
Inflation risk. Over the course of a 20- or 30-year retirement, even modest rates of inflation can severely crimp the lifestyle of retirees who rely on income streams that are fixed in dollar terms, such as the interest payments from bonds,
Human capital vs. financial capital. Your human capital is your income-earning ability. Early in adult life, it’s your most valuable asset. Academic economists view the income from human capital as similar to the interest earned from bonds. To diversify your human capital “bond,” you might invest heavily in stocks when you’re younger. During your working years, your goal is to convert your human capital into financial capital—meaning a huge pile of savings—so that one day you can retire.
HUNTING FOR STOCK market winners is fun. Managing taxes is tedious. Yet a few hours each year devoted to minimizing your portfolio’s tax bill will likely yield a far bigger financial return.
Imagine you invest $10,000 for 30 years and earn 8% a year. If you lost 22% of your gain to taxes every year, you would have $61,467 after 30 years, which sounds impressive. Now, instead, suppose you could defer all taxes for 30 years,
IF YOU JUST ENTERED the workforce, it’s time to start preparing for retirement. Over the next four decades, you might pull in tens and perhaps hundreds of thousands of dollars every year. It’s lucky you have all that income coming in, because ahead of you lies life’s toughest financial task: amassing enough money so you can retire in comfort. In dry economic terms, your working career is about accumulating enough financial capital, so that one day you’ll no longer need the income from your human capital.
FINANCIAL LIFE PLANNER
Step 1: Prep for Success
Step 2: Stockpile Cash
Step 3: Doctor’s Orders
Step 4: Aim to Retire
Step 5: Shed Bad Debt
Step 6: Protect Your Pay
Step 7: Buy a House
Step 8: Plan Your Estate
Step 9: Make Projections
Step 10: Educate the Kids
Step 11: Revamp Insurance
Step 12: Pay Off Debt
Step 13: Quitting Time
Step 1: Ask Why
Step 2: Pick Your Provider
Step 3: Cover Cash Needs
Step 4: Off the Shelf
Step 5: Build Your Own
Step 6: Fend Off Inflation
Step 7: Tilt Your Portfolio
Step 8: Add Alternatives
Step 9: Keep Your Balance
TO SUCCEED AS AN investor, you don’t need to turn yourself into a “quant”—Wall Street lingo for a quantitative investor. But it is helpful to have a grasp of basic investment math, so you appreciate how time can magnify the virtues of saving regularly and investing in the stock market, but also how it can magnify the damage done by high investment costs and an overly aggressive investment strategy.
This might sound daunting. The ideas involved,
TO FIGURE OUT WHETHER it makes sense to buy taxable bonds or tax-free municipal bonds, you first need to find out your marginal federal and state income tax brackets. Let’s say you are in the 32% federal income tax bracket and a 7% state tax bracket. Meanwhile, suppose you are choosing between a muni bond from your own state that yields 3.05% and a corporate bond that pays 4.95%. Both have similar credit quality and duration.
WHAT EXPLAINS America’s miserably low savings rate? There’s no shortage of suspects. You could finger our lack of self-control, as well as our tendency to favor today’s spending and shortchange tomorrow’s goals. You can cite seven decades of post-war prosperity, which has made Americans confident they can weather financial storms, despite skimpy savings and hefty debts. You could blame rising aspirations amid increasing income inequality, which have left low-income families spending ever more as they seek to keep up with the Joneses.
I PROMISE TO BEHAVE better tomorrow. What happens when tomorrow becomes today? All bets are off.
Our broken promises might involve money, such as committing to spend less, save more and pay down debt. Or they might involve some other aspect of our life, such as committing to eat healthier, exercise more and drink less.
All this highlights our irrationality. We may not be experts in nutrition, physical education and money management. But we have a pretty good idea of how we ought to behave.
WALL STREET’S inhabitants have many unpleasant qualities: greed, arrogance, disdain for customers, inflated self-importance, a sense of entitlement. But all this is made worse by another unappealing trait: They’re so damn prickly.
The degree of prickliness is closely correlated with the outrageousness of the fees they charge. I saw this again and again during my decades as a financial journalist. I can’t recall an index-fund manager ever throwing a king-size snit, and it was rare that I got a nasty letter or email from a fee-only financial planner.
IF YOUR GOAL IS lower investment costs, the financial world has never been friendlier. Let’s say you want to buy the broad U.S. stock market. You can choose between a Schwab exchange-traded index fund that charges 0.03% of assets per year, an iShares ETF that levies 0.03% or a Vanguard mutual fund that costs 0.05%.
Those expense ratios are truly astonishing: If you had $100,000 to invest in the broad U.S. market, your annual fund expenses would be just $30 or $50.
MONEY ISN’T AN END in itself. Rather, it’s a means to other ends. But what ends? Some people have a good handle on what they want from their financial life. But for others, it’s a lifelong struggle. They purchase endless possessions that bring only fleeting pleasure. They pursue goals that they belatedly discover aren’t all that important to them. Result: money worries, excessive spending, mountains of debt and fierce family arguments.
How can we avoid this mess?
PEOPLE LOVE TO TALK about themselves. Today’s subject: me. Over my three decades of investing, I have tried to cultivate three traits. In other circumstances, none would be especially endearing. But as an investor, they’re my best friends.
1. I’m clueless. Occasionally, I forget how ignorant I am. I might convince myself that I know where interest rates are headed or that I’ve found a stock market sector that’s truly undervalued. Fortunately,