Every other Sunday, Money360 reviews a personal finance book.
This is the eighth book in the “Little Books” series on investment topics, and I’ve reviewed all of the previous ones (… of Bull Moves in Bear Markets, … of Common Sense Investing, … of Value Investing, … That Beats the Market, … That Builds Wealth, … That Makes You Rich, and … That Saves Your Assets – all links to my earlier reviews of these titles). For the most part, each one provides solid coverage of a specific investment topic – I particularly liked the “Common Sense Investing” (which covered index funds) and “Value Investing” entries in the series.
This one, Main Street Money, may be my favorite of the lot.
Instead of looking deeply at a specific investment strategy, Jonathan Clements (the author, and long time Wall Street Journal columnist) instead looks at how real people actually invest. For almost all of us, carefully following an investment strategy isn’t the center of our lives. Investments aren’t our life, they’re a way to protect our money and build a little more without consuming our lives with research and worry.
Clements’ book offers twenty one simple truths for this type of real-world investing and personal finance in general, and he does it in a very engaging way. Let’s dig in.
Our Finances Are Bigger than a Brokerage Account
Many people (at least those on stable financial ground) often associate their personal finance success entirely with their investments. It’s really a much bigger picture than that. Are you free from debt? Are you spending excessively? Do you have an easily accessible emergency fund? There are countless issues that point toward (or away from) personal finance health that have nothing to do with your investments. This really speaks to me, since I view investing as just one of many, many topics worth talking about on Money360.
We Can’t Have It All
There’s not enough money in the world or time in the day to have everything we can possibly want. You can’t be a great parent, have a strong career, maintain tons of friendships, and keep up your health – something will slack somewhere. The key is spending the time to figure out what you want the most.
Money Can Buy Happiness – If We Spend It Carefully
The real reason many people find that more money doesn’t bring happiness is that they tend to spend it in ways and on things that don’t reaffirm what their life is all about. Unless your life is intrinsically defined by your cell phone, spending more money on a cell phone won’t bring you any sort of lasting happiness. Instead, focus your spending on the things that truly matter to you. Maybe it’s the hobby you’re constantly drawn to. Maybe it’s your family. Maybe it’s your life’s work (if you’ve discovered it). Focusing your money and energy and time towards maximizing that if you want lasting happiness.
Even the Best Investors Need to Be Great Savers
If you don’t live well within your means, you’ll never be a great investor. A great investor improves returns by being able to invest more to begin with, and they come up with that additional capital by employing some restraint in their lives. They live frugally and don’t waste money on frivolous things that are fairly unimportant to them.
Time Is as Valuable as Money
Most of the things we’re really working for in life boil down not to money, but to time. We save for retirement so that we can have a longer and more secure life. We carefully juggle work responsibilities so that we have more time to spend with the people most important to us. Time management is just as vital as money management when it comes to building the future we want.
No Investment Is Risk-Free
There are no guarantees in life, and every investment has some form of risk (yes, even Treasury notes, which have the risk of the failure of the United States government to repay its debts). Investing in cash has the risk of inflation, for another. However, it’s always vital to recognize that some investments have far more risk than other ones. Riskier investments often offer far greater upside than less risky investments, so you need to consider how much risk you can tolerate before you even invest.
Portfolio Performance: It’s All in the Mix
The best way to earn a good, strong, consistent return on your investments is to diversify across many different investment types – domestic stocks, international stocks, bonds, cash, real estate, and so on. There is no perfect formula for the “best” portfolio because different markets go up and down at different times, often not in relation to one another at all. However (unless you’re an incredibly focused investor), your best route is to diversify widely.
Stocks Are Worth Something
Stocks left a bitter taste in many people’s mouths after the 2008 stock market fiasco. However, as long as businesses operate, offer their shares to the public, and pay dividends on those shares, stocks will always be worth something. Stocks do have intrinsic value in the form of their dividends (or potential future dividends) as well as a fraction of the asset value of the company. The only danger is when these shares get overinflated due to hype, which happened in 2000 and 2007, as well as many other times. That’s why it’s worthwhile to mix stocks with other investments, so you don’t lose a large chunk of what you have during a bubble popping.
To Add Wealth, We Need to Overcome the Subtractions
Minimize your costs. If you allow even an extra percent worth of fees on your investments, you drastically reduce the long term returns on that investment. Thus, it’s well worth your time to study different investment options available to you and choose the one that offers the lowest fees while still giving you the option that you want. That extra time invested up front in finding a brokerage that doesn’t nickel and dime you to death pays off tremendously over time.
Aiming for Average Is the Only Sure Way to Win
Given the constant fluctuation of investments and the impossibility of predicting the future, attempting to constantly “beat the market” is a fool’s game. You might do it over a very short period, but then dynamics change and you quickly lose what you gained (and often more). Instead, shoot for just trying to match the average of any market you invest in and ride the tide. This has a big advantage because it means you can invest in index funds, which are known for having very low costs while merely matching the average of the market – exactly what you want.
Wild Investments Can Tame Our Portfolios
Some portion of your portfolio should actually be in risky investments that are themselves diverse – areas that are greatly out of sync with what’s going on in “mainstream” investments. In other words, put some (relatively small portion) of your money in things like precious metals and emerging markets. Often, these do the opposite of what the bigger markets are doing (since that’s where many investors move their money when other markets are faltering), so if you’re already there, you can ride it the whole way up, offsetting the losses in other areas. Mix up your risks and diversify – it’s good for you.
Short-Term Results Matter to Long-Term Investors
You might be investing over the long term, but you may in fact wind up needing that money in the short term. In other words, short term results do matter to long term investors. Don’t put your money in investments that can have big short term losses if you can’t afford those short term losses.
A Long Life Is a Big Risk
Many people plan for a retirement that lasts fifteen or twenty years – that’s a good number to live by. But what if you live far longer than that? If you retire at sixty five and live to 105, that’s forty years of living. A long life is a serious risk to consider when planning for retirement, and one way to hedge against it is to simply invest more into your retirement. I talked about this very idea a bit earlier today, in fact.
Markets May Be Rational, but We Aren’t
We aren’t perfect. Human psychology often gives us strong impulses that are great to follow in the real world, but incredibly dangerous to follow when it comes to investments. The best way to overcome these is to carefully consider a plan and simply follow it, not allowing ourselves to change course because of a sudden gut feeling or a particular scare.
Our Homes Are a Fine Investment that Won’t Appreciate Much
Many people talk about their primary residence as a major investment. It is a great investment, but only in the sense that it keeps a roof over your head. Most of the time (excepting a housing bubble), houses aren’t a great return on an investment. Sure, you can own homes for the purpose of renting them, but those arrangements cost time as well as money – and if you choose to pay someone to management, the return (after all of the costs are paid) rarely makes it worth the risk.
Paying off Debts Could Be Our Best Bond Investment
If you just want a great steady return on your money, most investment experts will point you towards bonds. However, it’s just as effective to pay off a debt – and often more lucrative. If you’re buying bonds at 3% while you have debts at 6%, you’re not making a very good investment choice. Consider debts as being equal to bonds and put your money wherever the highest percentage is.
Saving Taxes Can Cost Us Dearly
If you’re buying a house just for the tax benefits, you’re making a huge mistake. Quite often, tax benefits just help a person recover a small fraction of the costs – and sometimes not even that much. The same goes for many other kinds of investments – tax benefits are often completely overemphasized compared to the actual gains the average person can expect from the tax benefits.
A Tax Deferred Is Extra Money Made
Deferred taxes – like those with a 401(k) – are more useful than they seem on the surface. Obviously, there’s the advantage of the smaller tax burden right now, but what that also means is that you can afford to invest more than you otherwise would. Moving your 401(k) contributions from 1% to 11% doesn’t mean that you’ll bring home 10% less each paycheck – it’ll actually have less impact on that. With tax deferment, you can invest more now.
Insurance Won’t Make Us Any Money – If We’re Lucky
Never consider insurance to be an investment. Insurance is nothing more than protection against the unthinkable. If investments are tied into the package, it’s like buying a Swiss army knife – you’re getting a mediocre screwdriver with your knife and paying a hefty extra cost for the “convenience.” Keep your investments and insurance separate and minimize the cost on each one – separately.
Even If We Have a Will, We May Not Get Our Way
If you’ve accumulated significant wealth, a will alone may not protect your financial assets and ensure that they’re distributed how you like. It may be worthwhile, late in your life, to set up a trust and sign your assets over to that trust. The trust then effectively “pays” you for the remainder of your years, then the trust follows whatever instructions you set upon your passing. It’s a great way to ensure your financial assets are handled in the way you wish after you’ve passed on.
Financial Success: It’s About More than Money
Financial success means having the time and the resources to enjoy the things in life that are most important to you, whether they be
Is Worth Reading?
In terms of advice that’s actually appropriate and useful for 99% of the public, is far and away the best of the “Little Books” series. The advice is truly approachable and actually useful, particularly for people who are in reasonably good financial shape and have a lot of years left ahead of them.
It’s not a be-all end-all of financial planning. Instead, it just provides – in Clements’ approachable writing tone – excellent basic advice and principles to follow. This advice is timeless and forms the foundation of whatever personal finance strategy you might choose to follow – this book is a great starter.