Chapter 15
Thoughts on
Personal Finance
I would say that Dorothy and I have
done far better financially than I would ever have expected. While we are by no means wealthy, we have
been able to reach our retirement years comfortable and without the financial
worries that plague many people. It has
not always been so with us, for my income never was more than modest, only
reaching the low six figures near the end of my academic career. You do not go into teaching to get rich, even
at the college level. Admittedly, at the
college level you have opportunities for much more supplemental income than
teachers at other educational levels who must spend the bulk of their time with
classroom duties. Still, most of my
colleagues at the universities I've been a part of have not well tapped the
potential for supplemental income.
I would
like to tell you what I see as the secrets of our success, the principles that
guided Dorothy and me through our lives.
Embracing
frugality. — People in our generation growing up before World War II have for
the most part been branded by the Great Depression of the 1930s. The harsh economic conditions instilled a
mindset far different from that of our children and grandchildren growing up in
much more affluent times. We learned to
husband our resources, be they a few pennies from a dime or quarter allowance
(if, indeed, the family could even dole out allowances), or the few dollars we
might earn as we got older from cutting grass, babysitting, delivering
newspapers and the like. I well remember
getting 50 cents for a hot afternoon cutting a neighbor's lawn; this was almost
a windfall as smaller lawns went for a quarter.
When I got my first job at seventeen as a soda jerk at Hines Cigar Store
in downtown Des Moines, I felt affluent at getting 35 cents an hour—this sure
beat cutting lawns and delivering papers.
The
lessons of forced frugality were all positive.
They taught us delayed gratification. We became accustomed to saving up for major
purchases, such as an air rifle, archery set, or bicycle. In those days credit cards had not yet
arrived, and we would not have qualified for one if they had. But the patience imposed and the diligence in
saving carried over to adulthood and a lifetime.
A
frugal lifestyle brought with it a shunning of extravagances. We did not need the most expensive item to be
happy; a more modest product usually would do just as well. As I became an expert in marketing, my
prejudices against buying the most expensive product were reinforced. I knew with certainty that the most expensive
brands, be they clothing, beer and liquor, shoes, appliances, even cars, were
generally poor values for the money.
They carried by far the highest percentage profit margins for the
manufacturers and for the vendors, so that even if the quality were a little
better, it certainly was not enough better to be worth the high markup and
price. In my research studies I learned
that the claims for the purity and health benefits of bottled water were a
farce: this water that is more expensive than even beer and soft drinks is no
better than tap water, and often less pure.
Marketing hype accounts for the delusion of consumers.
A
frugal lifestyle seeks the best value for the money. When considering a purchase, whether a
tangible product or a vacation and lodging, or a night out on the town. I like to ask myself this question: are we
likely to enjoy the product (or experience) enough to be worth the price? Sometimes Dorothy and I disagree about the
value of the experience. For example, I
find it hard to justify paying $150 to go to a play, which at best will be
enjoyed only for a few hours, while if I don't like it, they ought to pay me
for wasting my time. But we sometimes
still go to plays.
We have
practiced judicious frugality all our lives, and we have enjoyed the challenge
of getting the most for our money in value and satisfaction. We have not felt deprived if we didn't always
stay at the grandest hotel or eat at the fanciest restaurant. But the tangible results have been well worth
it.
Be a
knowledgeable investor. — I firmly believe that everyone should seek to be
well versed in the basics of personal finance and investing, regardless of
income and assets. Ideally, this pursuit
of knowledge should come as early in life as possible. It can be an intriguing lifetime
endeavor. Books abound on personal
finance and investing, while even high schools and adult education programs
offer such classes. As a person is able
to accumulate more and more discretionary income (income beyond basic
necessities), such knowledge becomes more important. But it is also important in motivating saving
so that you have something to invest.
Numerous research studies have found that those who are most irrational
in their spending are not the very wealthy but the very poor. Those so mired in hopeless poverty lack the
motivation to even try to escape it.
Be wary of financial advisers. — The alternative to developing
reasonable knowledge is to leave this to someone else, to delegate these
decisions perhaps to a banker or a financial adviser. Unless a person has a very large estate, well
into the millions, I do not think a financial adviser is necessary and may
actually be injurious for those who are too trusting. Even with a large estate it is better to seek
advice on only limited matters, and not entrust much of the portfolio to these
consultants. The advice they give is
seldom any better than your own judgment, if you have made a reasonable study
of the subject. They charge big fees to
handle your investments and they tend to be biased toward options that give
them more commissions, such as annuities and broker-dealing mutual funds. Sometimes an estate can be decimated by
financial "experts" who put your portfolio into risky speculative
investments, or in the worst scenario be guilty of fraudulent actions. Even under the best circumstances, the
management fees for such advice and actions are considerable, and commission
rates for frequent trades benefit only the broker.
Under
no circumstances would I ever give any professionals free rein with my
portfolio, to manage it as they see fit and without my approval of all
decisions. Of course, if you know
nothing about investing then you are vulnerable to opportunistic brokers and
consultants, just like a little old lady who is a patsy to be preyed upon. But
even this little old lady can learn enough from books and other sources to have
some savvy.
I
became hooked on investing in my twenties.
I had a poor-paying management-trainee job with Penney’s—they told us
the job “has great future earnings, but you have to be patient.” As I mentioned earlier, Virgil Meyer, a good
friend and my age, was with Shell Oil Company working far less hours and making
twice as much as me, and was investing steadily. This spurred me to read everything I could
about investing, even though with extreme frugality I was able to squirrel away
only a few hundred dollars to invest every three or four months.
Invest for the long haul and don’t
worry about short-term fluctuations. — Short-term traders seldom do as well as long-term
investors. The in-and-out buying and
selling incurs heavy expense and tax consequences, and requires a time
commitment incompatible with most job demands.
This doesn’t mean that you should never sell a losing investment, but
patience may be better rewarded.
Vanguard Mutual Funds. — Mutual funds offer the best way to
invest for the person new to the game or unable to devote a lot of time to
investing. But there is a great variety
to choose from, with some much better than others in their return on your
money. I like the Vanguard family of
funds because they charge the lowest expenses in the industry, and are very
efficient, customer friendly, and ethical.
Furthermore, you buy these direct, not through a broker middleman. I’ve even written up the Vanguard success
story in several of my books. These will
give you a steady and growing income, more so than savings or money-market
accounts, and without the risk of most individual stock investments. Vanguard offers many funds, including corporate
bond funds, tax-exempt funds, as well as many stock categories and balanced
funds that include both stocks and bonds in their portfolios.
Diversify your investments. — As you accumulate more money to
invest,
diversification becomes more and more important if you
are not to subject yourself to unacceptable risks. Let me explain why, and then talk more
specifically about how to diversify.
The
opposite of diversification is to put all your “eggs in one basket.” This would be akin to putting all your money
on one number at the roulette table. Of
course, if your number comes up you win big, but the odds are so heavily
against you as to be scary. Mutual funds
offer diversification, but one or two funds probably do not offer enough. With the plethora of mutual funds today,
choices are mind-boggling. I find that
with a good mutual fund family, such as Vanguard, more than one fund is still
desirable if your portfolio is much over $25,000. A money market fund gives you great liquidity
for expected purchases or expenditures.
A stock fund is desirable, such as Vanguard’s Windsor and/or the 500
Index Fund, for long-term capital appreciation.
A balanced fund, such as Wellington or Wellesley, gives you a taste of
both stocks and bonds. As you have more
money to invest, you may want to increase your investment income by buying some
bond funds, such as High-Yield Corp, and maybe a Tax Exempt Fund. As you acquire still more assets to invest,
other investment opportunities may seem promising, such as Emerging Markets, or
Small Cap Stocks. As you become more
knowledgeable about investing you may want to try your hand at buying some
individual stocks, and closely following these stocks in the papers. Still, beware of too much concentration, or
on the other hand too much diversification that becomes difficult to pay
adequate attention to. Generally, half a
dozen different investments would be sufficient for a $25,000 portfolio. For a million-dollar portfolio, twenty might
be the maximum.
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