One of the reasons financial planning can be so difficult is things are constantly changing. And I’m not just talking about the markets, economy or technology.
Your circumstances, opinions, priorities and general relationship with money change over time as well.
Strong opinions, loosely held is my theory. Here are some money topics I’ve changed my mind about over the years:
Sleeping at night is not always the right goal for your portfolio. There’s an old story about J. P. Morgan who once had a friend who was so worried about his stock holdings that he couldn’t sleep at night.
The friend asked, “What should I do about my stocks?”
Morgan replied, “Sell down to the sleeping point.”
I understand the idea here. Selecting the right asset allocation is all about trade-offs and one variable is your appetite for risk. But figuring out what helps you sleep at night can be terrible advice for many investors.
I had numerous conversations with people who would have slept better at night if they could have sold out of their entire portfolio and went to cash during the depths of the market crash earlier this year. Had they done so they definitely wouldn’t be sleeping better now that stocks have recovered their losses.
The problem is your preference for risk often changes more than your tolerance for risk based on what’s happening in the markets.
You could hold your entire portfolio in cash and sleep like a baby for years only to realize later in life you’ve lost money to inflation over time. Or you could throw all of your money into only the best-performing fad companies at the moment and feel better about your positioning until those investments blow up in your face.
Most good investing should be at least a little uncomfortable at times.
Factor premiums are probably a thing of the past. I’ve read all of the academic research. I’ve seen every backtest that shows certain risk factors could have earned you premiums over market beta in the past.
The behavioral arguments for those factors have always made more sense to me than the academic finance theories underpinning them but I’m beginning to come around to the idea there are no premiums anymore.
Investors have too much information, computing-power and knowledge about market history that simply didn’t exist in the past.
Does this mean factors like low-vol, value, quality and momentum are useless if this is the case?
No. It just means you own different factors in your portfolio for the diversification benefits, not some premium you wish you could have earned in the 1960s. Even if these strategies return the same as the overall market but do so with different correlation and volatility characteristics, they can still help in the context of an overall portfolio.
I have re-adjusted my expectations for these types of strategies going forward. It’s probably time for quants and their investors to do the same.
I’m becoming more comfortable with debt. The 30 year mortgage rate is less than 2.9% right now. After factoring in the tax breaks and inflation, you’re basically paying nothing to borrow money right now.
I have never been a huge fan of taking on debt but in recent months I took out a home equity line of credit on my house. I have no use for the money at the moment but it almost seems irrational not to when borrowing rates are so low.
Maybe these low rates are here to stay but it’s also possible people will look back at 2-3% mortgage rates in the future and wonder why more people didn’t take advantage.
Now I’m not suggesting everyone can handle taking on more debt. But I am personally coming around to the idea that I would be foolish if I didn’t take advantage of generationally low interest rates.
Many personal finance experts would scoff at the idea of borrowing more money but we’ve never been in a situation like this where rates are so low, both in terms of borrowing and the yields on your savings.
My views will probably change on this if rates rise but right now this is the world we’re forced to deal with. Life would be easier if risk-free rates on savings accounts were higher. Low borrowing rates might be a decent consolation prize if you can intelligently employ that debt.
Saving all of your money does not make you happy. Through some combination of genes, learned habits from my parents and my personality I have been a saver for as long as I can remember. Even when I was a little kid I would hoard any birthday or holiday money I received as presents.
These habits have come in handy when it comes to saving for retirement, my kids’ 529 plans and keeping a buffer for unplanned expenses. Saving money is the number one personal finance skill you need to master in order to get ahead in life but it took me a while to realize saving money for the sake of saving money is not a worthy goal.
The way you spend your money is just as important as your savings habits. You just have to spend your money on the things that are important to you.
For me that’s finding ways to create more experiences and memories with my kids, buying time to spend more doing the things I’m interested in, investing in myself and only paying up for something if it’s going to move the needle in terms of increased efficiency, happiness or convenience.
And giving myself permission to spend money on those areas that truly make a difference is balanced out by cutting back in places that don’t move the needle.
Saving money is important but I don’t believe you should save money on everything. How you spend your money can have a large impact on your well-being if you’re conscious about how and where it’s being spent.
I am a huge proponent of saving money but life is too short to save everything.