financial security Archives - Lazy Man and Money

I’m reviewing Money Magazine’s 7 New Rules of Financial Security. You can read Part 1 here.

Rule No. 4: Borrowing

Old thinking: Borrowing sensibly is a good way to build wealth.
New rule: Borrow cautiously. You have to worry about the other guy’s debt too.

Money Summary: Credit was cheap and plentiful like food at Sizzler. Americans acted as expected and ate as much as they could. Now there’s lots of vomiting going on. Next time don’t eat so much. (Sorry, that might not have been Money’s exact point, but I couldn’t avoid the analogy.) Side point, you may be exposed to more leverage than you think. People paying you money may have been leveraged… their leverage becomes your problem when they can’t pay you.

Lazy Man’s Take: Sounds like money is saying that moderation is the key. Hmmm, I remain unconvinced that’s a new rule. I do like the side point though. It’s something that I hadn’t thought about. I had done a lot of investing with Prosper and have found the returns not very good (though my Lending Club returns have been great). Perhaps everyone else’s leverage became my leverage.

Rule No. 5: Housing

Old thinking: You can expect your house to appreciate handsomely over the long run.
New rule: Your home won’t make you rich. But it is an important savings tool.

Money Summary: Except for two decades where real estate had skyrocketed real estate has been in line with inflation. Real estate also has other issues when it comes to investing in it: maintenance costs, insurance, taxes, remodeling costs that rarely pay for themselves, and steep buying and selling costs. Still owning a home is a great “‘commitment device,’ or a tool that forces you to save.”

Lazy Man’s Take: There’s a great chart with the article. It’s well worth clicking over to. I’ll be here when you back. Done? Good. Back in May of 2007, I suggested the housing run up may be due to more people having dual incomes. Maybe I was wrong and it was government subsidies in the 1940s and easy credit and low interest in the 2000s. If that’s true, there’s going to be a lot of disappointed real estate investors.

As far a commitment device goes, it’s pretty easy to set up an account and automatically funnel money into it. You can invest your money in things with returns that not just in line with inflation, but actually exceed inflation.

Rule No. 6: Diversification

Old thinking: A diversified portfolio lowers your risk.
New rule: Diversification won’t always save you – and you need more of it than you think.

Money Summary: Diversify even more. Get an international bond fund. Use Morningstar’s Internet X-Ray tool.

Lazy Man’s Take: I feel like I already wrote this rule. I love diversification, but I don’t think this is really new. The old thinking and new rule basically say the same thing to me. A lowered risk implies that it won’t always save you. Otherwise the old thinking would have been “diversification eliminates all risk.” I have been using Morningstar’s X-Ray Tool for years now.

Rule No. 7: Retirement

Old thinking: Retiring early is a prize.
New rule: Retiring early is a problem.

Money Summary: With 401k accounts shrinking the odds of retiring early is much more unlikely than it was in the past… and it wasn’t very likely then. Staying at your job for another year could make a big difference in if your money lasts. Lastly, you have to consider that you might not be able to work if you want to – your health and the job market could push you out as you get older.

Lazy Man’s Take: Once again, all solid information, but I’m not sure it’s a new rule. We’ve known for a long time that working an extra year makes a huge difference in retirement income. It’s a year you aren’t withdrawing and are adding to the next egg.

I’m going to stick to the old thinking… The new rule isn’t very motivational.

Money Magazine’s big headline this month is the 7 New Rules of Financial Security… and Why You Need to Know Them. I have to admit it’s a pretty sweet headline – it certainly caught my eye. I flipped right to page 50 to see what I needed to know why. With that in mind, let’s take a look:

Rule 1: Risk

Old thinking: If you can stomach the ups and downs that come with risk, you’ll be rewarded.
New rule: Risk isn’t about your stomach. It’s about making or missing an important goal.

Money Summary: – Money notes that it becomes much more difficult to retire when you reach a bad stretch in the market. The money you have left over is not enough to build up to where it was. Since you aren’t likely adding new money in retirement, you can’t capitalize on cheap stocks. “This bear market’s lesson is… only risk how much you can lose and still meet your basic goals.”

Lazy Man’s Take:

I didn’t think it was new to only risk what you can lose. I thought that was a universal truth. I see people go into casinos with this mentality all the time (unfortunately not 100% of the time). I agree that it makes sense to bring down your risk exposure as you near retirement. However, the new question is how much? Previous philosophy said that even at age 65, you still may have 15-30 years left, so you need to make your money stretch that long. That requires risk exposure.

Perhaps part of that answer is diversified income streams? Don’t put all your eggs in the equity markets, but have a rental property as well? Perhaps build some businesses that deliver cash flow that can be used in retirement. I don’t know if this website will be around in 35 years (I hope so), but there’s a chance it could get me through some lean years. Just don’t look into selling MonaVie.

Rule No. 2: Cash

Old thinking: Keep enough money in ultrasafe accounts to cover life’s emergencies, but no more.
New rule: Relying more on cash can rescue you in an “asset emergency.”

Money Summary: – The old emergency fund needs to be re-evaluated. Instead you need to look at big potential future purchases in the next three years: “tuition, wedding, down payment on a house.”

Lazy Man’s Take:

I think this is fairly basic knowledge as well. That’s why they have 529 plans that re-adjust with the child’s age to reduce risk. It’s really not much different than the previous rule except it’s not focused on retirement. They could have just as easily said here, “don’t risk what you can’t lose.” I hate to be all bah humbug here, but in an emergency situation weddings can take a back seat. Also, I know few people who need to buy a house. Know what you are risking, and if you are risking too much than know you may have to cut back.

Rule No. 3: Human Capital

Old thinking: The longer your time horizon, the more stocks you should own.
New rule: Time isn’t everything. You must also consider your earnings potential.

Money Summary: – Think about your job security as part of your overall risk profile.

Lazy Man’s Take:

This is sound advice that I don’t often hear. My wife has the near equavalent of tenure at her job. It’s allowed us to be a little more risky than we might have been. I’ve been able to take some time off and work on building other businesses. Put another way, if you are going to be in a band and have a hit song, you might want to put a pile of that money in a safe place in case your the next Soft Cell.

Perhaps this goes back to Rule #1 and diversifying your income streams. You don’t want to be completely dependent on equity markets. In my personal life, I found that someone is willing to value my human capital more than my side businesses, so I switched back to take advantage of that situation. Six months from now, it may be different and I’ll go back to building out my side businesses more and more.