April 25, 2002
From the desk of Jane Galt:Patrick Ruffini asks how come
Patrick Ruffini asks how come I'm not giving stock tips.
Well, first of all, that's not quite my area of expertise. (If I can be said to have an area of expertise.)
Secod of all, I'm Chicago-trained, so I subscribe to the notion that you can't beat the market in the long run.
Empirically, this is true. The stock market is so well traded that arbitrage opportunities vanish almost as soon as they appear; professional money managers who spend all their time researching companies, according to studies, earn back just about what it cost them, in economic terms, to find the information that allowed them to invest better. I'm not going to spend all my time researching the market, and I don't think I'm smarter than the people running the mutual funds that underperform the market. So I buy low-fee index funds (there are more sophisticated products that do the same thing with a superior return, but they take more money than I have to buy in). Of course there are problems with this approach; for one thing, when a stock joins an index like the S&P it's price jumps about 5-10%, so the assets are overpriced. But I would find this argument more compelling if all the active stock-pickers who pointed this out to me hadn't underperformed their indexes in both the boom and the bust.
And third of all, financial advice is serious and personal. I could say broad, true things: don't put all your money in equity; don't expect more than 3-5% annual real returns; don't invest more than 10% in the sector you work in, much less your company, even though it's "What you know" (you're not Peter Lynch, and he diversifies like hell); don't hold high-interest debt in order to buy securities of any sort unless their real yield is higher than your debt (it's not, in almost any case); don't base your investment decisions on what everyone else is doing; don't think you're a genius because you correctly picked on stock that did well. Monkeys throwing darts at the Wall Street Journal could hit one high-flyer.
In other words, act sensible and don't expect to get rich on the stock market. Allocate your assets between different securities and different industries. Don't put all your eggs in one basket.
But this isn't helpful, because you already know this, and you're ignoring it. You're plunging your net worth into things, hoping they'll go up and you can get rich and retire. You're holding credit card debt while you put money into a Roth IRA. You're not putting a sensible 40% into equity, even though retirement's only 20 years away, because bond returns are too low; you're putting it all into equity, and planning to switch into Munis when you're seventy. At least, if you're anything like the rest of America, that's what you're doing. So I'd be talking to myself.
If you don't know how to allocate assets, do a discounted cash flow, or estimate pre- and post- tax costs for a variety of time periods, get yourself a good financial planner. A good financial planner is one that doesn't sell you anything. He takes a fixed fee and tells you what to do with your money, spanks you gently for not saving enough, and helps you plan realistically for retirement. He helps you decide what sorts of investments, in what kinds of accounts, will maximize your post-tax income. And you pay for this advice, up front and through the nose.
A bad financial planner is cheap. He works for a firm that sells financial products, and therefore tries to foist on you whatever insurance/mutual fund/equity/debt product they have too much of. You will regret saving money this way when you are eating cat food because the Muni of the Month Fund tanked on you.
A good financial planner is recommended by someone you know well, someone prudent. Someone who is probably a little sheepish about how boring their retirement plan is.
But I won't give specific advice because first, it's not me, and second, the law of averages says that even if I'm brilliant, I'll be wrong a lot of the time and someone will lose money. So I'll stick to the tired-but-true platitudes that put everyone to sleep. You'll follow this advice -- or not. But at least you won't sue me for telling you to buy Yahoo at 200.
Posted by Jane Galt at April 25, 2002 9:50 PM | TrackBack | Technorati inbound links