Happy New Year! Hope everyone has a happy, safe and prosperous year. During my absence from the blog, a friend of mine asked what, if anything, I had learned about personal finance during my years of blogging. The advantage of not doing something everyday is that it gives you perspective on a subject matter.
As many of us use the turning of the calendar as a milestone to commit to or recommit to our own personal finances, I would suggest that my years of blogging have taught me at least 3 things:
Personal finance is like anything else in life. What you get out is a result of what you put in. The book The Millionaire Next Door stated it the best- those with financial independence spend nearly twice the number of hours a month than those who did not experience the same degree of financial independence or security. As an absolute number, the number of hours is actually quite modest at an average of 8.4 hours a month. This is approximately 1 hour for each of the 8 weekend days in a month. If you read enough personal finance blogs, you will understand personal finance is theoretically simple- spend less than you earn, save the difference and control your emotions. Spending 8 hours a month devoted to these principles will go a long way in getting your financial house in order.
Grade A execution of a grade B strategy will trump a grade A strategy with grade B execution. I am not a dogmatic passive or active investing advocate. I am, however, a large advocate of picking a reasonable strategy and sticking to it for long periods of time. If you read enough personal finance blogs and forums, the issue tends to be people hop in and out of strategies too quickly.
Bill Miller, a mutual fund manager who outperformed the S & P 500 for 15 straight years before under-performing the same benchmark, is often used by passive investing supporters on why active investing will eventually revert to below benchmark returns. However, an investing seminar I attended noted one interesting fact; most investors who bought Miller’s fund during its successful run made below market returns because they bought and sold at the wrong time. It wasn’t that active investing was a wrong strategy per se. Instead, investors executed the strategy poorly.
This is not confined to active investing alone. Canadian Couch Potato once fielded a question from an investor questioning her passive investing strategy after only 3 years! Again, the issue is not with the strategy but the execution of the strategy (my favorite saying from a seasoned business executive friend is “the only thing that happens quickly in life is losing money”).
Having said all of that, what constitutes a proper strategy is ultimately a function of knowing yourself. The better one understands what makes one tick, the better the strategy choice. For this reason, I do tend to support a passive investing strategy for those with little time or a poor grasp of business.
Do it yourself does not mean do it without advice. No person knows everything and learning from failure can be an expensive proposition. Seeking qualified and reasonable advice is key in life and personal finance (and let’s be honest, most for profit industries are mired in conflicts of interests. Is the financial industry particularly bad? Probably yes. But, removing the degree of the problem, is this any different than any other industry? Probably not. Time and effort is better spent planning one’s own financial future than wailing to the heavens about a paradigm of virtue that will never be. Call me a cynic).
Will such advice be hard to find? Of course, it will. Finding good advisors (I am using this term in the broadest sense possible) is like finding a good partner. How many losers did you date before you found your spouse or significant other? Life is a numbers game. Just because the journey is difficult does not mean it should not be taken. I would suggest that there are many mentors out there who may not work in the finance industry per se. We are a society that favors the new over the experience but the older generation raised in an age without abundance is a good starting spot for good advice (especially those under 30).
Feel free to add anything else in the comment’s section.
Due to increasing life/work responsibilities, I am going to a 2 blog/week posting schedule for 2011. As always, your comments/questions are always appreciated.
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