What We're Thinking: Nutritious Personal Finance

 

 

We’re all familiar with the principles of good nutrition. Eat a balanced diet. Exercise. That’s it.

The principles of good personal finance are just as straight-forward.
Spend less. Invest. Insure. That’s it.

We know about funky junky food, trendy diets, and how to lose weight instantly! We also know they are not sustainable or just don’t work. It’s because the basic principles are being ignored.

There are equally funky junky, trendy financial equivalents: the free lunch, message board fueled speculation, insurance sold as an investment, options trading, the come-hither call of meme stonks, leverage, blah, blah. As with nutrition, basic principles are being ignored.

 

Last week, Josh Brown, the Reformed Broker, put down a great piece titled How David Beats Goliath in Real Life. It’s about what the winners do. They’re not doing everything all the time, but certainly doing a few in any given moment. These are the qualities of nutritious personal finance. Here’s what the winners do:

· Invest time and energy in their work, and enjoy free time with family and friends.

· Decide what it means to succeed, then spend time with people who have already succeeded.

· Read books and articles that force in-depth, critical thinking instead of social media feeds. They don’t get gaslit by billionaires on Twitter who don’t even know or care about them.

· Focus on what they can control– how much they save and spend– and then allocate the rest to investing.

· Take advantage of tax-deferred accounts whenever possible.

· Diversify broadly and have the humility to accept the inherent unpredictability of the future.

· Don’t pay excessive fees or buy stuff based on internet hype, newsletter drivel, or the predictions of charlatans.

· Avoid wasting time on provocative political arguments and conspiracy theories. They're usually out in their communities doing valuable work.

· Understand the Paradox of Dumb Money, i.e., the moment it realizes it is the dumb money, it ceases to be the dumb money.

· Don’t tie themselves to meaningless standards like 30-day returns, quarterly performance, ranking vs peers, over- and underweights relative to an index and so on. None of that matters. No one outside of finance cares.

· Care about their own financial situation, not what they think someone thinks of them, or what their neighbors seem to be doing. Wealth is what you don't see and there are no incentives for claiming firepower.

· Know that their game has a high probability of success.

So, we present ourselves as financial dieticians, like this short video describes. Let us know how we can help.

Jim Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315

 

 👉 Tip of the Month

 

2020 2021 2022 HSA Contribution Limits: Individual and Family Coverage
Harry does a great job of explaining important details as well as providing the numbers.
The Finance Buff

 

 

 

 

What We're Thinking: There's No Tide Table

 

   

We like maritime analogies, even if one of us lives far from any major body of water.

Investors in 2021 find themselves caught between two strong opposing tides. 

• One is that financial market valuations are at a historically high tide. Speculation (think Tesla, bitcoin, options, Robinhood) pervades the space. In similar prior conditions, future returns have been disappointing. This would suggest a careful, maybe even defensive stance.

• The other is that monetary policy has pushed interest rates to a historically low tide. Future returns can be reasonably estimated by current yields. Such yields are slim and almost none. This is causing some otherwise careful investors to consider riskier strategies. We would resist that inclination.  

But here’s the key take-away: Tides change! The problem with financial markets is that there isn’t a reference tide table app. There’s just lots of data, sailors with different vessels, incentives, and imperatives, and the capricious winds of fear and greed.

Your incentives and imperatives likely fall into three categories: Liquidity, capital preservation, and wealth-building.

Everyone needs liquidity. It’s what you use to pay the bills and manage lumpy, more or less random deposits and withdrawals. That's the cash in checking accounts, savings accounts, maybe CDs. Some call this an emergency fund; we like to call it a Reserve. You don't need to rationalize an “emergency” to spend out of a Reserve.

Capital preservation means to sustain the purchasing power of financial assets over the next 5-10 years. We want to be confident that we’ll be able to make equivalent purchases in the future that we can make today. That means offsetting the effects of inflation and taxes. With interest rates at low tide, this is not easily attained, if at all.

Wealth-building means to accumulate financial assets that go far beyond capital preservation. This is appropriate for younger people and anyone with goals that are 10 years or more in the future. A diversified, globally-allocated portfolio of equities (stocks) is likely to be the most reliable path to this objective. The “cost” will be to live through inevitable periods of downside volatility and perhaps several years of poor performance.

Your incentives and imperatives will change over time. We’re here to have the discussion that helps you stay aligned with them, and let the tides do what they do.

Jim Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315

👉A TAX TIP
Secure your tax identity: Get an IRS Tax ID Number!

The IRS now offers tax identity protection to all taxpayers in every state. This is a voluntary program designed to block fraudulent returns that might be filed by someone else in your name. The program is called Identity Protection PIN Opt-In Program (IP PIN). An 84-second YouTube video here briefly introduces the program.

Start here: https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin
Half-way down the page, click on this: Get an IP Pin
Click ‘Yes’ to create an account. (If you’re married, both people must do this individually.)
This takes about 14 minutes.

What We're Thinking: A December to Remember

This December in this year is much more than “that time of the year again” to offer perspective and outlooks. The New Year in front of us is more of a question mark than a certainty. Yes, we hope for a more positive, constructive, civil tone. We hope for an effective vaccine rollout. We hope for a revitalized economy that works for everyone.

A clear-headed, open-hearted, and historically relevant assessment would be ideal. But that’s a difficult challenge. Two formative biases need to be overcome: recency and confirmation.

Recency bias means we overweight whatever is happening right now. Trust me. Whatever we think is important right now will be far down the list a year from now. Remember what you said to people this time last year?

Confirmation bias is when we quickly accept that which agrees with our pre-existing beliefs or sentiments. To mask or not to mask is a good example. Lazily confirming our priors is a sure path to disappointment.

So, in the spirit of brevity-- because we know you have a lot of zooming and Amazoning to do-- here are the key take-aways for the next year:

• 2021 will look different but feel a lot like 2020. It will be volatile, uncertain, complex, and ambiguous. Be ready to adapt. Again.
  

• Financial markets themselves are as vulnerable now, if not more so, than they were a year ago.

• The use of time-tested principles, evidence-based strategies, and rules-driven discipline will remain our guideposts.
  

This applies everywhere- to our health, wellness, relationships, and “the world out there”- as well as to our personal finances.

Now, recall what you’ve come to believe or re-member over the past year. What was a high point and low point? What inspired you? What gave you hope? What disappointed? These are valuable and useful insights. No matter what your age, they all matter in the arc of your life.

The next year will bring new challenges and changes. So, here’s a question to ponder during these last few days of COVID year:

What can I do now-- that my future self or family or community will thank me for a year from now? 

Go do that.

May you have a Joyful Holiday Season and Thrive in 2021!

Jim Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315