October Newsletter is out! Financial Books to read and avoid ~ and some handy definitions!
Over the last few months, markets have generally continued their winning ways. It is worth noting that:
The S&P 500 is up roughly 15% year to date and the Nasdaq is up almost 20% this year.
International equity markets are up broadly more than 25%, with this return enhanced by a weakening dollar.
Much hand-wringing has revolved around The Fed and the prevailing notion that interest rates will drop. The Fed cut interest rates by 0.25% in September with more rate cuts expected this year as central bankers seek to right-size interest rates in an economy that is sending sometimes conflicting signals.
What does this mean for my clients?
With equity markets having a strong run up, it is worth taking a look at your accounts to "rebalance" and get back to your target allocation. If you are an ongoing client, this will be covered in our quarterly meetings.
Placing some of your equity allocation into international stocks is a nice diversification play and generally part of my standard recommendations.
With short-term interest rates beginning to drop, it is wise to have just enough (but not too much) in your high-yield savings account and similar holdings. We have been rewarded by high short term yields but that will begin to wane. Check your cash holdings to make sure that you do not have excess funds parked there.
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One of the challenges of my role is understanding what clients know about financial terms and then filling in the gaps. As people come to learn about the financial system in a variety of ways, it can be dangerous to assume what my clients know.
In advising clients, here are a few terms that get thrown around and sometimes glossed over:
A custodian is the firm that holds your financial assets. They have, well, custody of your assets. If you have an investment account at Fidelity, Schwab or Vanguard, they are your custodian. In addition to safeguarding the assets, custodians can handle settlements, track investors' transactions, maintain records and operate in compliance with the U.S. Securities and Exchange Commission (SEC) regulations.
Sometimes you control the account and decide on the custodian; sometimes you don’t and can’t. Your 401k has a custodian that is chosen by your employer. Sometimes these are larger brand names, sometimes they are a bit more obscure. Regardless, their role is the same. As well, your bank has custody of your checking account funds.
Within your custodian, you have an account type. These vary by tax treatment and specific rules governing them. These include standard (taxable) brokerage accounts, 401k, Roth IRA, 403b, etc. They are ultimately governed by the rules of the account type, regardless of how they may be packaged.
Finally, there are investments or assets. A financial asset derives its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds, and bank deposits are examples of financial assets. Unlike land, property, commodities, or other tangible physical assets, financial assets do not necessarily have inherent physical worth or even a physical form. Rather, their value reflects your share of the assets and cash flow of the firm, factors of supply and demand in the marketplace in which they trade, as well as the degree of risk they carry.
A few takeaways:
It is possible to have an investment from one company that has a different custodian. You can have a Vanguard ETF in a Fidelity account (Fidelity is the custodian).
It is sometimes possible to change the type of account where your money / investment resides, whether you change custodians or not. One example is a Roth Conversion.
Putting money in an account is not the same as investing it. A contribution to a Roth IRA account will generally sit in the account and earn minimal interest until you give instructions to invest it in Vanguard 500 or another investment. I have heard people say “this Roth account isn’t earning much” for this reason.
Investments and withdrawals have certain rules or policies depending on the type of account. Taking money from your checking account and putting it in your investment account to invest is easy. Pulling money prematurely from a 401k must follow certain rules and regulations, with the taxation dependent on certain circumstances.
Hey, where have you gone?
You used to be the one that we looked up to
It seemed like nothing could break you down
How high was the price? Was it worth it?
From “Kids and Heroes” by the Bouncing Souls
"You either die a hero or live long enough to see yourself become the villain".
From “The Dark Knight (Batman)”
As I take an educational approach to my work with clients, I am always open to learning from others…and recommending sources of quality financial education. While clients don’t pound down my door asking for book recommendations, I do share content from others that I think will resonate with them…as well as this newsletter, which works to introduce topics on a drip so that we can always up our game.
What is maddening in reviewing content is that there are “gurus” that often do a great job on some issues and then break their pick on others, which inspires my choice of quotes at the top. As such, blanket recommendations are tough. Even among the good ones, they do have different areas of focus and worth reading a few to see what resonates with you. As the legendary golf instructor Harvey Penick said to an overzealous student "When I tell you to take an aspirin, please don't take the whole bottle,"
Here are some names (good and bad) that are easily found on Amazon and other media sources that are worthy of mention
Dave Ramsey does a great job of putting people on a budget and getting them out of debt, providing a voice of reason specific to excessive spending. I love that reality check and his pushback on consumer culture! However, he has had a legacy fixation with front-end loaded mutual funds, which charge 5% up front as a sales fee from the start (I recommend low-cost ETFs instead ) As well, he has at times suggested that retirees can pull 8-12% from their 401ks on an ongoing basis in retirement without fear of running out of money. While the actual number is up for debate (and is likely 4-6%), Dave’s guidance presumes that markets are generally untouched by bear markets and other fluctuations. That is not the case. I tend to steer away from his content for these reasons. Be careful….
Robert Kiyosaki burst on the scene years ago with his unique book, "Rich Dad, Poor Dad". This supposedly non-fiction fable shows the contrast in habits and approach of his well-meaning but financially struggling Dad (“Poor Dad”) and his friend’s prosperous “Rich Dad”. I actually think that the first few chapters of his original book share notable insight and basics on financial statements and the differences between being an employee and a business owner. Sadly, his insights have gotten more quirky, shall we say, over time and he is perpetually predicting stock market crashes or telling us to stock up on canned tuna. Sooner or later he will be right, I suppose, but who has time to wait? I don not recommend his work.
Confidence is a helluva drug and we can find its addicts out there. Grant Cardone is an example of those that have built an empire on real estate investing and sales trainings. There are many! You can have a great financial life without getting psyched up at an all-day conference. Steer clear.
Fortunately, there are some great ones out there to draw from:
Morgan Housel has written three books that are deceptively simple. You won't need a calculator to read them but he does challenge conventional wisdom and that is though provoking.
Ramit Sethi has built a great platform through his books and Netflix specials. He encourages individuals and couples to envision their Rich Life from a clean sheet of paper and is dismissive of societal arbitrary milestones (such as buying a house by the time you are 30). As long as you are grounded in your numbers, your expenses and save for your goals, he is cool with you if you eat Top Ramen, drive an old car and wear $500 sweaters. I like his approach, energy and thought-provoking content. Sacred cows make great burgers.
Christine Benz writes for Morningstar and has a plethora of content available. I have frequently recommended her book (How To Retire), which is a multi-faceted look at this simple and complex concept of retirement. The book looks at all aspects of retirement, including your health and how to spend your time. As well, her Morningstar content has a lot of basics and specific on the mechanics of investing Committing to reviewing her weekly content as a New Year’s Resolution might bring you closer to putting me out of a job. She will make you smarter and more confident around your financial life.
Bill Perkins wrote a book called Die with Zero and I will admit that the simple contrarian title brought out the skeptic in me. It's written from the perspective of a hedge fund manager that will never run out of money and it presumes that you won't as well. However, it does challenge readers to think about how they spend their money and what their options are. If you live to 90 and leave your kids a pile of assets when they are 60 and your grandkids are done with college….well, maybe they could have used the money twenty years earlier and maybe you could have spent it with them to build memories. He points out that memories compound in value just like money and spending money on a great experience today gives you ten years to think about it rather than funding the same experience ten years from now.
The Millionaire Next Door books written by the late Tom Stanley provide a research-based approach to the habits and practices of those how have verified wealth. Entrepreneurs and school teachers receive equal treatment and it is good perspective for those that are reading several books – this should be one of them. Multi-millionaires often drive a used Camry.
Suze Orman has been giving financial advice through books, shows and podcast since before the Roth IRA or iPhone existed. She has recently puzzled many by suggesting that retirees need $10 million to retire (untrue for my clients) but over the years she has provided some good info. As with Dave Ramsey, good with some basics but tread lightly.
Jean Chatzky is often found in the media as well as through her books and has a lot of solid content on kitchen table issues – I like her common sense approach.
If there is a common thread here, it is my advocacy for listening to those that have a fact-based approach and a bit of humility. As well, an understanding of what drives us and has shaped our thoughts on money is a worthy approach and as much about our psychology as anything else. Humans want to optimize around experiences, contentment and sleep, not “dying with the most toys.” I hope there is a new name on this list that might help you.
What books or podcasts are helpful to you?
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Quotes that recently caught my eye:
"I’m interested in that thing that happens where there’s a breaking point for some people and not for others. You go through such hardship, things that are almost impossibly difficult, and there’s no sign that it’s going to get any better, and that’s the point when people quit...but some don’t."
Robert Redford, who passed away in September at the age of 89.
"We care too much about short-term consequences
and too little about long-term consequences."
Julia Galef
“How a person treats their waitress is a great indication of their character.”
Amy Poehler
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