Financial Thinking

2009-10-13

As mentioned, I've been reading intensively about personal finance since early May. While that doesn't make me an expert (far from it!), I have drawn a number of tentative conclusions:

  1. When it comes to money, no one has your best interests at heart. Financial advisers, bankers, brokers, mutual fund managers, and the like are in the business of taking your money or at least skimming off enough of the profits to keep you from reaching your financial goals, so you need to take control over your own finances (just as you would take control over any other important aspect of your life, such as your career, your family, your home, your health, or your happiness).

  2. It is important to have a rainy day fund consisting of at least a few months' living expenses (because I'm fairly conservative, I prefer a year's expenses). I keep this money in cash and cash equivalents, such as Treasury bills, notes, and bonds (you can buy Treasuries without a middleman at TreasuryDirect.gov). For the greatest yield while maintaining safety, you can "ladder" Treasuries, for example by buying 20% each of 1-year, 2-year, 3-year, 4-year, and 5-year securities (in fact there are no 4-year Treasuries, but you can work around that). Watch out for bank risk and even sovereignty risk (you can hedge against the dollar through foreign-currency CDs from EverBank, but I have not yet gotten fully comfortable with their offerings). Putting 10-20% of this money in gold and silver is probably a good idea, either directly in physical coins or through services such as BullionVault (which I've been quite happy with); I think of the metals portion as the "hurricane fund" because gold and silver are truly needed only when it becomes *really* rainy.

  3. In the long run, there is no better investment than the stock market, but the money you invest must be long-term money because the market is volatile (however, over the long run there is greater risk in so-called riskless Treasuries and bonds because they will not outpace inflation). As far as I can see so far, the best investments here are not index funds or other mutual funds, but dividend-producing stocks, because steady (and steadily-increasing) dividends produce ever-improving yields through the power of compounding. My research so far indicates that you can achieve 5-10% annual real returns over periods of 10 to 30 years (the time horizon that most people care about for retirement) through careful investments in a diversified portfolio of ~25 dividend-producing stocks. However, I have not yet implemented this approach because I'm waiting for stock prices to drop, which I expect they will do in a serious fashion by the end of 2010 (as one book I've read put it, why are stocks the only things that people want to buy more of when the price goes up?).

  4. Don't take my word for it. Read lots of books on the topic (my favorites so far are Bull's Eye Investing by John Mauldin, Unexpected Returns by Ed Easterling, and The Single Best Investment by Lowell Miller). Follow some of the finance blogs (I especially like Mike Shedlock, Calculated Risk, Seeking Alpha, Top Gun Financial Planning, and Dividends Value). Sift what you learn through your own understanding of the world, align various lessons with your own values, and continually ask questions instead of taking things at face value. Remember, you're in charge!

  5. Investing is not primary. Your primary focus needs to be on your career, whether you are an employee or an entrepreneur or the manager of your household. Don't get so wrapped up in the crazy world of investments that you miss out on the more fundamental opportunities in your economic life.

  6. No matter how much money you make (whether in your career or through investing), you can get behind if you spend too much. As they say in baseball, good pitching and good defense beat good hitting every time (in fact, there are a lot of interesting analogies between investing and baseball, and I might even write a book about that someday!).

I'll report further once I've completed more research and clarified my thinking about investing.


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