People Make Their Finances More Complicated Than They Need To Be
by Roger Nusbaum AdvisorShares ETF Strategist
Morgan Housel posted a great list of investing and personal finance heuristics ($12 word for rules of thumb) titled One-Sentence Financial Rules although a couple of them are two sentences.
A few years ago Nassim Taleb offered useful insight that was broad based including that (paraphrasing) everything we need to know about finance we learned from our grandmothers; don’t get into debt, save your money and don’t lend money to other people.
The big idea with this sort of thing is to live simple financial lives, save a lot of money, avoid excess debt and keep investments simple. As a quick side note, last week ETF.com reported that ProShares filed for a slew of ETFs that track different parts of the CDS market. Keep that in mind as CDS ETFs are the exact opposite of what Housel’s post is about as well as this one, or any article talking about financial simplicity.
Housel begins by noting that with the tens of thousands of finance books and billions words in those books, it all boils down to “work a lot, spend a little, invest the difference.” That will seem familiar to long time readers of Random Roger where I’ve talked about living below your means and the importance of a high savings rate because that is far more within your control than investment returns.
Another familiar nugget from Housel was “every five to seven years, people forget that recessions occur every five to seven years” which is of course behavioral; people forget what bear markets feel like and panic all over again. Several times I told the story of a former client who would come emotionally unglued during market declines but who found no solace in the fact that he had seen more recoveries than I had.
“You’re only diversified when some of your investments perform worse than others.” If everything you have goes up together with the market, then how diversified are you really? What will happen when the market goes down?
“Respect the role luck has played on some of your role models.” This pertains to life in general. And for a little hippie nonsense, there is a tie in here to the law of attraction which I am a huge believer in. We contribute to our own good luck with the right attitude.
“You can probably afford not to be a great investor — you probably can’t afford to be a bad one.” This is an argument for simplicity. For do-it-yourselfers this probably means diversification through funds.
“Imagine how much stuff you’d have to make up if you were forced to talk 24/7. Remember this when watching financial news on TV.” Earnings season will be starting soon. You don’t need to guess/bet with your money whether any stock will beat estimates, miss them or make news with guidance.
Read the whole thing.