*There is a book being released on November 17, 2020 that I believe will be one of the best finance books of the year. The book is titled: “How I Invest My Money: Finance Experts Reveal How They Save, Spend and Invest.” It was brilliantly put together by Joshua Brown and Brian Portnoy and each contribution includes a beautiful illustration from Carl Richards. I am thankful I was asked to contribute and I thought the best way to introduce the book to you would be to share my personal contribution. There is much more information about the book following my contribution below.*
“Keeping Things Simple”
I grew up in a household that didn’t enjoy a lot of excess. We were beneficiaries of the free lunch program in school and we huddled in front a temporary heater on cold winter mornings. That was common around the area I grew up, so it never seemed out of place. Don’t get me wrong though, we were lucky. Our needs were met and we often gave away what little excess we had to families less fortunate than us. It was obvious that caring for others was important to my parents. The older I’ve gotten, the more admirable I find that to be. As I imagine is true for many people, much of how I manage our family’s financial life is probably defined by my childhood experiences. I believe in keeping things simple and it starts with defining enough.
Enough from a worldly perspective is an ever-moving target because there is always a bigger boat, bigger house, nicer car or more extravagant vacation. But enough is defined internally, not externally. For me, enough is acknowledging the line between satisfaction and excess. Thanks to my childhood, I don’t require much in the way of material things to be satisfied.
I believe common excesses often complicate life rather than make it more fulfilling. As they say, I never want the things I own to end up owning me. I have never cared about expensive watches, high-end cars, having the biggest house or anything like that, so I am sure it’s easier for me to come to grips with this idea than others. I believe it is healthy to have wants that go unfulfilled. We live comfortably, but anything beyond enough is to be saved or given away. We keep it simple.
Since I began my career, our household earnings have increased year over year, but we have deliberately kept our lifestyle the same. Few people discuss the impact lifestyle choices can have on their financial future, but I believe it will account for about 80% or more of our personal financial destiny. It’s not going to be the fund choices or any other tactical decision that will determine our success. It will be our ability to live well below our means. Though, it cannot be done alone.
My wife and I are both fiscally conservative when it comes to our household spending. We are both avid savers and we desire to give much away to people and causes we care about. We give not only because we care about the cause we are giving to, but because it is good for our souls. We have been very lucky and believe we are called to be good stewards of what we have been blessed with.
We are not fans of debt and pay cash for just about everything, cars included. The only debt we maintain is our mortgage due to the low interest rate. I follow the same advice I have given to many clients in similar situations and haven’t paid a penny more than is owed since we purchased our home ten years ago. To me, having the funds available to pay it off if we needed to is the same as the mortgage being paid off. It works for us.
We have three primary financial goals:
- Prepare for retirement,
- Pay for college for our two sons, and
- Be prepared for life’s what-ifs.
Executing on these goals is where keeping things simple really applies. I believe people spend far too much time trying to optimize every little thing, especially their portfolios. Once something is good enough, I move on to more pressing issues.
When investing for retirement and our children’s education, I will excitedly say that our portfolio is 100% equities. Some might say this is foolish and that we should own some percentage of fixed income to reduce the volatility of the portfolio, but I disagree because we have no short-term goals. It is widely accepted that anything that reduces short-term volatility must also reduce long-term return. Given this fact, it seems illogical to own anything but equities assuming we have the emotional fortitude to think truly long term. I believe we do and will continue to own 100% equities.
As for the equities we own, if I am honest—and I say this with tremendous respect and admiration for my colleagues in investment research and fund management—I believe the quest to squeak out a few extra basis points of return is a waste of time for the typical Main Street investor, myself included. Why? It’s not because I believe it can’t be done (it surely can), but because the quest for alpha is entirely out of my control and because it is entirely unnecessary for achieving our financial goals.
Part of keeping things simple is seeking areas we can reduce frictions. In other words, I want to eliminate uncontrollable risks if at all possible. Attempting to beat the market must also introduce the risk of underperforming the market as well. If we don’t need to beat the market to achieve our financial goals, what sense would it make to introduce the possibility of moving us further from our goals?
If our goals require beating the market, I believe we should revise our goals rather than attempt to do something that introduces other risks. Market returns should be good enough for our needs.
We invest our portfolio into a diversified mix of index funds and other than rebalancing our accounts, we do not touch them. I don’t believe in continuously optimizing our portfolio because one fact most people willingly ignore is that all portfolio optimization is based exclusively on past data. That sounds obvious, but there seems to be a disconnect since our industry focuses so much on this idea.
If all investment research is based on past data (there is no other data), then any portfolio deemed “optimal” is out of date before it even begins because we are investing into the future where everything is unknown. In other words, we can’t know what optimal is until the future gets here, at which point it’s too late. If there are no facts about the future, why bother trying to optimize something that is entirely unoptimizable?
I believe being willing to stick to a diversified portfolio of index funds is the closest thing to an investing superpower that exists in the age of shiny object syndrome. Patience seems to be a much simpler and more satisfying road to our financial goals than always trying to find the next best thing.
We currently contribute monthly to my Roth 401(k) and our taxable account. Given our income levels, it may or may not be a smart long-term decision to choose Roth if we end up in a lower tax bracket in retirement, but I do it anyway because I don’t mind paying taxes now. I care much more about what it could mean for us in the long run. The future tax bill is another potential friction I can eliminate by investing in this way. I also consider the question of whether I would rather pay taxes on the seed or on the tree? With 30-plus years of potential tax-free growth ahead of us, I prefer to pay taxes on the seed.
Our taxable account is becoming our most sizeable account. We look at it as an extension of our savings despite it being all equities. If we needed funds beyond our emergency savings, we are willing to accept the possibility that the market may be in the tank when we need it, if it means that we can position ourselves for higher probable returns for years to come.
The purpose of our taxable account is to provide for both retirement and education. We do not utilize 529 plans for education because we prefer optionality rather than tax benefits. If our sons end up joining the military, getting an unlikely scholarship or doing something entirely different, we are no worse for it and may provide for them in other ways because we can. By saving this way, we have given ourselves options.
For our third goal, preparing for life’s what ifs, I am a big believer in insurance. I have enough life insurance to provide for my family in perpetuity and cover our education goals if something should happen to me. I have disability coverage to provide for my family if I am unable to work, and we have adequate liability insurance for the remaining what ifs. Insuring ourselves for what can go wrong is what allows us to invest for what can go right.
Understanding what matters most to us and what we are trying to achieve provides the guideposts for establishing our strategic and tactical plans that allow us to sleep well at night. There is no one right way to do anything financially, you must find what works for you and stick to it.
More on the book, How I Invest My Money:
The book includes contributions from various experts in finance (all noted below), so there is a wide range of career paths represented. There was very little direction provided with regard to what we wrote and that was done very purposefully. They wanted each contributor to write their personal take on the subject, so each contribution is especially unique to the author.
Having read the book, not only did I truly enjoy hearing what others had to say, but I derived tremendous value from hearing how everyone manages their personal finances.
Personal note: I receive no financial benefit from the sale of the book. That said, if you enjoy reading my site, you will almost certainly enjoy reading this book and I encourage you to pick up your personal copy!
The book includes contributions from Morgan Housel, Christine Benz, Brian Portnoy, Joshua Brown, Bob Seawright, Carolyn McClanahan, Tyrone Ross, Dasarte Yarnway, Nina O’Neal, Debbie Freeman, Shirl Penney, Ted Seides, Ashby Daniels, Blair duQuesnay, Leighann Miko, Perth Tolle, Josh Rogers, Jenny Harrington, Mike Underhill, Dan Egan, Howard Lindzon, Ryan Krueger, Lazetta Rainey Braxton, Rita Cheng, and Alex Chalekian.
This post is not advice. Please see additional disclaimers.
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I am a Financial Advisor in Pittsburgh and a CERTIFIED FINANCIAL PLANNER™ professional with Shorebridge Wealth Management. I enjoy helping clients and readers find sensible answers to retirement’s big questions. If I can answer any questions for you, feel free to Contact Me or if you think you might be a fit for our practice, see Who We Serve.