Saturday, March 10, 2018

Financial Advice on an Index Card

    Being an avid reader of Financial Independence books and blogs, somehow I missed a remarkable advice given back in 2013.
    A professor at the University of Chicago said that: "The best financial advice for most people would fit on an index card". One of the readers commented on his post : "What *is* this simple free best personal finance advice that fits on a card? It's kind of a tease to say its so easy and then not go ahead and spell it out in twenty seconds.
    Here what the professor responded, by hand writing it on an index card:
  • “Max your 401(K) or equivalent employee contribution
  • Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20XX funds (Note: I tried that but expense ratio is higher for them. Target fund is 0.14% vs. 0.04 S&P500).
  • Never buy or sell an individual security. The person on the other side of the table knows more than you do about the stuff.
  • Safe 20% of your money.
  • Pay your credit card balance in full every month (Note: I say do not use them at all. Its a gamble).
  • Maximise tax-advantaged savings vehicles like Roth, SEP and 529 accounts.
  • Pay attention to fees. Avoid actively managed funds.
  • Make financial advisor commit to a fiduciary standard. 
  • Promote social insurance programs to help people when things go wrong (Note: Its capitalism we are living in, not communism)”.
     I looked at the advice given by the professor and realized that I will need some of the items on my to do list (such us saving 20% of my money). Some of the tips are up to the interpretation For example, is it 20% of the salary or the income?
    My only reservation that if everybody will follow the advice and invest in mutual funds, this will lead to communism, as performance will not be of importance (or unnoticeable) to the individual investors, as long as your company is in the index.
     While the financial industry savagely attacks bitcoin under environmental pre-text (it used to be threat to democracy) : "The cryptocurrency uses as much CO2 a year as 1m transatlantic flights. We need to take it seriously as a climate threat". What they are really worried about that bitcoin will eliminate the middle man (the banks and financial industries). With them we will stop wasting energy on : driving to work, heating and lighting the huge building in downtowns, personal jets, sports cars, yatches and all other surplus the financial industries extracting from their customers. Of course, advertising budgets will be affected too.
     Recently an established consultancy (Mercer) went as far as saying that : "Asset managers should pay investors to run their portfolios and provide performance guarantees instead of earning fees regardless of the returns delivered to their clients".
     Under Mercer’s proposal, active fund managers would retain any additional gains they made from stockpicking only after they had delivered a guaranteed return plus a fixed annual fee that had been agreed with clients.  Any shortfall in performance would have to be paid by active managers out of their own pockets to ensure that they hold real “skin in the game” beside their clients’ money.
    Although this sounds like an exciting proposal it comes with a lot difficulties - short term gain, vs. long term loss. Additionally, the asset management firms do not have much to back up loss in the performance. All the money they receive from their clients are promptly distributed among the partners and are in the save heavens. It would be an easier solution to avoid the active management by switching low-cost index funds.

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