Saturday, January 22, 2011

The Simplicity of Accumulation

Regarding (yet again) how an animation employee -- or most anybody else -- should save:

Take 10% of whatever you make and tuck it into savings/investments. Pay yourself first. Pretend that slice of the paycheck isn't there and live on what's left.

And here's what you should put the money into (and I think the investment reporter writing this is dead on) ...

... Mutual funds reporters lead a secret investing life. By day we write 'Six Funds to Buy NOW!' We seem to delight in dangerous sectors like technology. We appear fascinated with one-week returns. By night, however, we invest in sensible index funds. ....

After months of interviewing managers and studying statistics and strategies, I made only one move in my own retirement portfolio--into my fund family's more diversified index fund. The fund reporters I knew came secretly to favor low-cost index funds. ...

Unfortunately, rational, pro-index-fund stories don't sell magazines, cause hits on Websites, or boost Nielsen ratings. ...

The above was published in 1999, at the peak of the tech fund craze, a time when Animation Guild members were stopping me on the street to exult in their huge runups in the TAG 401(k) Plan's tech stock index fund. (What can I say? It was a simpler, more optimistic time. Of late, nobody has bragged about the huge profits they're making. Draw your own conclusions.)

Here's the distilled wisdom: Keep your investing costs as low as possible. Be broadly diversified with both stocks and bonds. Add more bonds to the mix as you get older.

That's it in a nutshell. (And the shell is simple, is it not?) But here are the two rules that are more difficult, and make the points above tougher to execute.

1) Don't chase returns in the latest "hot sector" (even though all your best buds are doing it.)

2) Don't bail out of your allocation of stocks and bonds when it's tanking. (And at some point it will tank.)

I encounter people at 401(k) meetings who tell me they have no interest in investing. I (sort of) understand their position, but let's get realistic here. This is your money we're talking about. And if you haven't got the gumption to read a couple of books on where to put the moolah and take a few hours to educate yourself, you're as foolish as somebody who declares they have zero concern about their health. ("I'm going to go right on drinking six packs of Colt .45 and gnoshing on Big Macs. I like it!")

I'm not advocating becoming some kind of obsessive expert on stock market trends, just arming yourself with rudimentary facts. If you do no more than putting your extra cash in a one-stop target retirement fund or asset allocation fund, you'll be ahead of ninety percent of the population.

4 comments:

Anonymous said...

Two deceptively simple, and incredibly important bits of advice in that post. Allow me to reiterate them.

1. Pay yourself first. People imagine that they're taking care of themselves when they pay their car payment, pay for their apt., pay to go to the gym or buy things. But that's just paying other people. Get used to putting that steady 10% into long term savings every single month (and exclude it from the money you're saving for a vacation/car/house/whatever), and you'll build an incredible habit that will serve you well later in life. Even people who are sure they can't afford to do this actually can -- it just takes discipline.

2. NEVER invest in whatever everyone else is excited about. The herd mentality of investing applies to housing/stocks/precious metals/tulips. This means that the point when absolutely everyone recognizes what the latest hot investment is . . . is exactly the WRONG time to jump into that investment. I can't tell you how many animators I know who are currently sudden experts in gold/silver investing. I'm old enough to have heard that song before. You'll make more money investing in the opposite of whatever everyone else is currently excited about not that that is an especially enlightened strategy, either).

Steve Hulett said...

Totally correct.

dfort said...

Thanks for writing this Steve. I wrote a long series of investment articles for my nephews and posted them on my blog. We are completely in sync with our investment philosophies.

Here are the links to my posts, if anyone is interested in the experiences of a fellow animation working stiff--I work in editorial.

Investment Lesson #1 - Before you invest you should save.
Investment Lesson #2 - Debt Securities
Investment Lesson #3 - Stocks
Investment Lesson #4 - Real Estate
Investment Lesson #5 - Other Investments
Investment Lesson #6 - Asset Allocation

Paul said...

One of my favorite financial authors is Jack Bogle, founder of the Vanguard Group, and inventor of the first index fund.

His "The Little Book of Common Sense Investing" is a great introduction to how investing for the long-term and paying attention to costs are the best strategy for the majority of investors.

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