Resolve 2.0

Happy New Year!

I’m back from blogging hiatus.  In lieu of writing my own New Year’s financial resolutions post, I’m going to start with this list of Financial Resolutions You Can Actually Keep from Barry Ritholtz.  It’s a good starting point for most people.  However, I’d like to point out where I think he’s wrong, oversimplifying, or missing the point, and hopefully improve upon the list.

Have a goal-based plan.

If you’ve read any of my other posts, you’ll know I agree with the sentiment here.  The question is not “how much money can I make?”  The questions are, What do I need?  What do I want?  What’s important to me?  Then analyze, prioritize, and make financial decisions that get you there.

However, as is common in financial writing, the author’s advice is an oversimplification and glossing over of a complex task that has as many possible outcomes as people who undertake it.   A goal-based plan should involve a thorough examination of one’s life, not just a listing off of anticipated future events – this is what makes it meaningful.  Am I actually working towards the things I want, or am I working towards the things I’ve been told I should want?

Beyond that, how many people have the skills necessary to ask the right questions and then do the appropriate calculations?  How do you determine the expected rate of return on your investments, taking portfolio volatility into account?  What’s your assumed rate of inflation and why?  If the numbers don’t work out the way you’d like, how can you evaluate various scenarios with different levels of income and/or spending?

Invest with a basic asset-allocation model.  Don’t try to beat the market.

Again, I think he’s exactly right.  But this one is even more fraught with opportunities for missteps, and he gives some innocuous-sounding investing advice that is not at all straightforward.

He recommends a “middle-of-the-road” 70%/30% stock/bond portfolio, which is dangerous and arbitrary.  After having just explained how investing should be a tool to achieve specific goals, he makes no mention of how the asset allocation should be a reflection of those goals.  The question is, How much risk do you need to take to achieve your objectives?  Maybe a 70/30 portfolio is appropriate, or maybe it’s way too much risk and puts achievement of your goals at risk.  He also says “repeat until retirement,” implying that the asset allocation remain the same.  At best, this is misleading; at worst, it could be devastating.   The right asset allocation at retirement is dependent on many factors, including the needs of the portfolio, expectations for longevity, and anticipated inflation.  And again, even for those who understand these concepts, accurately modeling these scenarios and understanding how to interpret the results are complex tasks.

Finally, he casually lists various asset classes, implying that these are the allocations one should make if following this investment philosophy.

Not at all true.  Depending on a number of factors (including taxes), corporate or muni bonds may have no place in your portfolio.  High-yield bonds may have no place in your portfolio (certainly not if you’re my client), as their historical returns have not been adequate to justify their risk.  REITs (Real Estate Investment Trusts) may not be warranted if you already have significant exposure to real estate.  And commodities… that’s a whole other post.  Commodities are not an investment.  They are pure speculation.  While investing in stocks and bonds is participating in the creation of value by companies, commodities are a zero-sum game.  One person bets the price will go up; the other bets it will go down.  If you want to play that game, go to a casino, but it has no place in an investment portfolio that is a tool to achieve your goals.

As for the rest of his advice, follow it!

  • Don’t trade
  • Max out tax-deferred accounts
  • See if you can get a lower interest rate on your debts
  • Review insurance
  • Save for college
  • Do estate planning
  • Bank online
  • Simplify!

It’s a lot to cover and not always easy.   If you have any questions, I’m happy to help.

Happy New Year to all.



1 Comment

  1. ·

    Such is the risk of writing 1200 words for a general interest audience.

    Discussing goal based planning is worthy of its own column — one that I suspect would put most people to sleep.

    Repeat until retirement refers to rebalancing.

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