By Brad Thomason, CPA
I think that in the modern world, among thoughtful persons, the notions ‘money isn’t everything’ and ‘you can’t buy happiness’ are accepted as truisms.
At the same time I think it is brutally true that if a person is having money troubles the odds are very high that it will spill over into other areas of life and make it much harder to realize much sustained/uninterrupted joy.
So that’s sort of a paradox.
Here’s another. Most people think nothing at all of spending forty or fifty hours a week for forty years to be able to pay the bills that come rolling in every month. Yet they balk at the idea of having to spend extra time setting the stage to be able to do nothing once they retire. It’s as if the simple passage of years is supposed to magically take care of all of their needs for two or three decades (or more) after they decide to hang up their spurs. Or perhaps, they put in their forty at the office, so it isn’t right that they should be asked to put in any more time/effort/thought as payment for some far-distant future benefit.
That has always seemed like a mismatch to me, too.
Well, we live in a world of paradoxes, and being upset by their mere presence or investing great efforts to attempt to resolve the unresolvable isn’t going to be anyone’s first, best use of time.
But I will tell you this. I’ve noticed that most of the people who end up doing well financially in retirement get there via one of three paths:
1. Those who accepted a lower salary during their working years in exchange for old-style retirement benefits. Folks like school teachers, government workers, etc.
2. Those who engaged in some sort of active money making, and did well with it. This would include business owners, professionals who have their own practice, and what you might think of as active investors like traders, real estate developers, and so forth. Notably, these people make a lot more money than the average person; and in the really successful cases, manage to keep their living expenses from growing at the same rate as their revenue.
3. Those who are extremely diligent at being financially responsible, across the broad spectrum of variables, their entire adult life, and who pile up a win one grain of sand at a time over a period of decades.
There are other paths to the goal than just these three. But in my experience, these three are the most common.
What I think is significant about all of these is that they inherently require aspects of extra effort, or sacrifice or both. These people did not get into the win column by accident, nor did they get there without paying a price. They might not have gone so far as to make their entire existence about amassing wealth and nothing else. But neither did they ignore it or act on any feelings of being slighted at having to make some sort of investment.
Whether they meant to or not, these folks found a way to take up a middle position within the paradox. They did not let money become everything. But neither did they lose sight of the fact that money troubles can foster far-reaching pain, and as such, are worth making an effort to prevent.
On all fronts, those are good examples to follow.
By Brad Thomason, CPA
A lot of people are wondering right now what to make of the stock market, and what to do about it.
There have been a number of points throughout the history of the last hundred years or so in which one could pile up all the theory and logic in the world on one side of the scale, and what actually happened in the market on the other, and the comparison would not even be close. Sometimes for good, sometimes for ill, what actually happens in the market can at times be the utter opposite of what should have happened, based on any sensible notion of how the market supposedly works and what it is supposed to represent.
Since 2000, you can find entire ten-year periods in which the market gained less ground than it did within the last year. I’m not sure either one of those facts make sense. But I am sure that they happened, and that investors were affected by that market activity far more than they were by the mountains of academic papers stating that the market works a different way.
One of the features of market activity the past couple of years has been a tendency for a few tickers to drive most of the net growth, while most of the others sort of milled around, netting out each other’s moves within the index measurements. This past period will be held up for many years to come as an example of why you just want to own the index and not try to pick individual stocks. If you were picking blindly over the past few years, odds are you would not have picked the relatively few that did the moving. But just because we have undeniably seen this sort of behavior recently, one cannot assume that it will continue to be that way in any sort of stable form going out into the future. It might. But, also, it might not.
Moments like these lead to a lot of head scratching. The question of what to do gets muddled with the question of why did this happen, and the result for a lot of people is a kind of paralysis. No one knows what to do, so they don’t do anything.
When I have conversations with people about this topic I usually suggest that they stop trying to figure out why the conditions are as they are. You don’t have to be a properly-calibrated theorist to make money in the market. Or lose it for that matter. Pondering why is not such a productive act, especially if it isn’t your job to be able to (try to) explain it to others.
Instead, focus on the action step. Because, it turns out, that may be a good bit more straight-forward.
If you haven’t retired yet, the standard response to a run up in one of your asset classes is to rebalance. You still face the question of whether to stick with the allocations you had before the period of increase, or whether to go hunting for some new opportunities. For instance, a lot of equities in other parts of the world have really taken a pounding during the last 18 months. So if you do not have an international allocation, now would be a good time to ponder adding one. Or, you can just use some of the gains from your US stocks to further build other domestic allocations in bonds, real estate, whatever. But either way, taking some action is probably better than doing nothing. A market run up provides you with a lot of new data, and new data is generally a good reason to reassess old decisions and plot new actions.
If you have retired, I would regard the matter much differently. If you’ve read any of the other materials on this site you probably know that I generally take the position that the risk of the stock market is not an appropriate one for those who have already retired. That goes double in cases where the person has reached a level of assets where it looks like they will be able to successfully fund their entire retirement need. If you’ve won, get off the field. That sort of thing.
Well, if you are already retired, and you had enough to endow your retirement, and you have still been in the market through this run up, congratulations. You gambled and won. So what’s your action step? Guess that depends on whether you want to keep gambling or not.
I find that a lot of retirees push back on the idea of exiting the market because they think doing so somehow violates some theory or directive that they think they are supposed to be following. They’ve read some book or listened to some talking head who has said that one is supposed to remain invested.
But if you press these authorities-on-the-matter for substantive reasons as to why that should be the case, most of the answers come down to being able to leave more money to someone else when you die.
Now, don’t get me wrong: I think leaving money to your kids or your church or a favorite charity are all fine goals. I just question why they would be on par with making sure you have all of your own financial needs covered. I don’t think they should be thought of as equals; one is much more important, to my way of thinking.
So, if you are retired and wondering what to do about the stock market, am I telling you to take the money and run?
I’m telling you that you certainly ought to give it some thought.
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