One clear benefit of tax seaon for me is that is forces me to take a wholistic view of my family’s finances. What are we making, what are spending and where is it going? This then leads to questions like “what now?” which leads me to the library for some answers or at least some ideas or insight. So here are three quick reviews, or really, reminders for me down the road.
The Investment Answer: Learn to Manage Your Money & Protect Your Financial Future, Daniel Goldie and Gordon Murray, Hachette Book Group, 2011. This is a slim book with a load of wisdom. The authors believe that every investor must address five major questions in order to become successful investors.
- Do-it-yourself or hire a pro? Hint: Independent Fee-Only Advisor.
- How’s your asset allocation? Or in other words, how’s your appetite for risk? With a great side discussion of volatility demonstrating that two portfolios with an average return of 10% over 10 years can result in very different returns if one portfolio has modest volatility and the other portfolio has high volatility. Read it to find out more.
- How are you diversified? Because different asset classes can have exposure to the same sectors or market risks.
- Active or Passive investing? Don’t fool yourself into thinking you can time or predict anything and fees can crush your returns over the long haul.
- Rebalance much? Gut check. Buy low – sell high really means periodically selling some of your best performing investments and purchasing under-performing investments.
The Triumph of Value Investing: Smart Money Tactics for the Postrecession Era, Janet Lowe, Pengion Books, 2010. A terrific introduction to the concept of Value Investing and much more accessible than Benjamin Graham’s The Intelligent Investor. A snap description of Value Investing is that good investors buy shares in good companies at good prices. This is not about guessing, projecting, or modeling outcomes. This is about protecting your principle and doing your homework. Or as Warren Buffet is quoted:
“I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections but we care very much about and look very deeply at track records. If a company has a lousy track record but a very bright future, we will miss the opportunity.”
The book ends with a checklist of how to build a portfolio. Target thirty-ish equities with good P/E ratios, a price at or below book value, a price below previous highs, and suitable dividend yields.
Zombie Economics: How to Slay your Bills, Decapitate Debt, & Fight the apocolypse of Financial Doom, Lisa Desjardins and Rick Emerson, Penguin Books, 2011. This book has good advice and is not afraid to pull any punches (i.e. don’t be overweight so you won’t get diabetes which can devastate a family’s finances or tell your folks to beat it if they are dragging you under financially). In a nutshell, create a worksheet of all income and expenses, pay bills immediately (autopay if possible), pay down debt ruthlessly (in descending order of credit card balance if you have multiple cards), under no cirumstances do you quit a job unless you have accepted a better job, put 10% of every paycheck into a savings account before ANYTHING else, never carry a credit card, spend at least 40 hours/week looking for a job if you don’t have one, eat-sleep-exercise right, and ultimately bend the curve so there is more money in you accounts at the end of a month than at the beginning of the month. And make sure the feds aren’t taking too much out of your paycheck as they aren’t paying you that back with interest.
So what did I get out of all this and what will I do differently? First, I am in the process of scrutinizing every regular input and output of our family balance sheet. Update the W-4, refinance the house, switch internet providers, begin monthly direct deposit for the girls college funds. Second, purchasing individual stocks is not for me when I could just slam away as much as possible every month into my 401k and other savings. Any time I could have spent researching stocks can be used to get better at my job which might result in more $ entering the system and then going into professionally-managed investments.