Someone, a co-worker, recently asked me if I could sit down with him to talk about personal finance. While I am flattered that anyone would ask my advice, I admonished him to heed that the recommendations of a physician about anything financial may be detrimental to one's economic well-being. While I may enjoy playing with the stock market and studying patterns and valuations, my interest in stock trading is merely that of a hobbyist using extraneous cash. My retirement plan, on the other hand, was developed years ago and set in motion with very little tweaking since. Having gone through the caveat of my innate ineptitude of all things financial, I agreed to meet with this colleague. Now, as I think about the topic, I'm not sure what type of advice would be appropriate. I give my medical opinions every single day to nearly perfect strangers who seek me out on the referral of friends, family and other health care providers, so why does the prospect of a small conversation about IRA's and life insurance give me pause? If I can meet a person and within 30 minutes review intimate details of their life and health, examine every orifice of their anatomy and then schedule them for a major surgery, then why would I hesitate to give a friend and colleague a bit of wisdom about their retirement that isn't even scheduled for another 25 years?
I have a recurring nightmare that entails a close friend or family member, say a sister, who asks my advice about a cash lump sum to invest. I caution them to be careful, but give statistics about the long term results attained in stock investing. I forward a copy of John Bogle's Mutual Funds or Burton Malkiel's Random Walk Down Wall Street, which is ignored. My nutshell recommendation is to dollar-cost average into a diversified stock and bond fund over 12 to 18 months. This nightmare takes place in the fall of 1999 when the market had enjoyed several years of a high trajectory return. My advice is only partially followed, the advisee hears the wonderful news about the stock market, but none of the cautionary language about the high valuation, and drops the entire amount into a tech fund in December 1999.
We know what happens next.
Fast forward to this week. Again, the market has been enjoying a near unprecedented bull run with all major indices at record highs, and more up-days this past 6 weeks than anytime since the 1920's, an ominous comparison in and of itself. Price-earnings ratios might be more realistic compared to 1999, but most market historians and technicians are expecting some type of pull-back or correction one of these days. The fundamentals of the macroeconomic environment show a slowing US economy with an accelerating stock market. What gives? What advice do I give now? Is this 1999 all over again? Or worse, 1929? Where are these would-be investors when the valuations and technicals portend less irrational exuberance?
Scott Adams, the creator of the Dilbert cartoon and franchise, has written a book Way of the Weasel in which he covers many topics, but none as succinctly as personal finance. The wisdom is in the simplicity. Do these 9 things, and your personal finance concerns will be history:
Make a will
Pay off your credit cards
Get term life insurance if you have a family to support
Fund your 401k to the maximum
Fund your IRA to the maximum
Buy a house if you want to live in a house and can afford it
Put six months worth of expenses in a money-market account
Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio
Simple if not easy. Ignore financial pundits, market mavens and get-rich quick schemes. Sometimes the best advice comes from the strangest sources, but that doesn't detract from it's value.
Getting rich is just as savory if attained slowly, and with a few Dilbert jokes to brighten the journey. This is where the conversation begins.
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