By Linda Leitz, CFP®, EA
Colorado Springs, CO
www.PinnacleFinancialConcepts.com
Do you like to read books about personal finance? Do you want to be better informed about finances? Here are some of the books I recommend to my clients, including my opinion on the strengths and weaknesses of each.
The Richest Man in Babylon by George S. Clason
This classic collection of short stories (originally circulated as pamphlets beginning in 1926) deals with basics of taking control of your money. The pillar of this book is that part of everything you earn is yours to keep. You should take that as seriously as you do paying your bills, so you can meet financial emergencies and save for your
future.
Strength: Good for motivation.
Weakness: It does not provide nuts-and-bolts specifics.
The Wealthy Barber by David Chilton
For people who are roughly 20 to 45 years old, this excellent book gives specifics on starting a very general financial plan. As with any book offering specific advice, not every financial planner will agree with each point.
Strength: Easy to read with specific steps you can follow.
Weakness: No book can know your situation, so the specific advice might not work for you.
Your Money or Your Life by Joe Dominguez and Vicki Robin
The authors say every dollar you spend has a corresponding cost: the time spent earning that money. Make each purchase—and decide how much you want to work—with this in mind. The book provides a very specific strategy: come up with a principal amount that you will use to generate interest income for living expenses.
Strength: Recommends balance in how much you work and how much you spend.
Weakness: The savings philosophy can be out of sync with reality if inflation rises and interest rates are low.
Why Smart People Do Stupid Things with Money: Overcoming Financial Dysfunction by Bert Whitehead
Bert’s philosophy (which I use in my practice) works for average people as well as wealthy ones. In my opinion, it’s the best approach because it incorporates all aspects of your financial life—your investments, retirement planning, your will, budgeting, your home, and your mortgage.
Strength: Practical, realistic strategies for real people.
Weakness: The title—lots of smart people don’t like to admit they’re dysfunctional.
Don’t Make a Budget: Why It’s So Hard to Save Money and What to Do About It by Kenneth F. Robinson
Too many people never save because they get bogged down developing a budget. This commonsense book shows that spending less than you make and saving money don’t have to be overwhelming. The book’s practical steps and real-life examples are workable for all income levels.
Strength: Relieves the reader’s guilt about not having a budget and makes saving achievable.
Weakness: None, if the reader implements the strategy and then takes the next step of enlisting professional help on more complex financial planning.
The Seven Stages of Money Maturity by George Kinder
Many people see money as a material necessity and don’t really feel they are in financial control. This book takes a more philosophical approach and, using stories from the author’s life and financial practice, expresses the relationship with money as an outgrowth of an individual’s spiritual outlook and values.
Strength: Takes a holistic approach to an individual’s financial outlook.
Weakness: Might seem too extreme for some or conflict with personal religious beliefs.
The Young Couple’s Guide to Growing Rich Together by Jill Gianola
Often young couples don’t need full-blown financial planning from an advisor, but do need to learn how to become financially responsible together. This book provides a fast start for couples who are willing to be serious about financial soundness before it becomes a big effort.
Strength: Easy read with practical advice.
Weakness: If combined with consultation with a financial advisor on the individual situation, there is no weakness.
The 9 Steps to Financial Freedom by Suze Orman
A step-by-step program to help you get control of your finances. The author discusses how we feel about money and how that affects our relationship with it. Most of her advice is sound, but the specifics might not fit your exact situation.
Strength: Specific steps for the do-it-yourselfer.
Weakness: Estate planning recommendations might be overkill for the average person.
Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money—That the Poor and Middle Class Do Not by Robert T. Kiyosaki and Sharon L. Lechter
The authors say real estate and self-employment are the way to strike it rich, and higher education does not make you financially secure. Unfortunately, you have to read the entire book, paying very close attention, to realize the authors admit their approach entails above-average risk and that you can be financially successfully with a more conservative approach if you stick with it.
Strength: Helpful explanations of assets, liabilities, income, and expenses.
Weakness: If something seems too good to be true . . .
October 15, 2009
October 1, 2009
A Lost Decade?
By Stewart Farnell, Ph.D., CFP®, EA
Boulder, CO
www.stewartfarnell.com
The investment research company Morningstar reported recently that the average return for the Vanguard Total Stock Market Index Fund Investor Shares for the last 10 years was −0.66%. In other words, the U.S. stock market has had negative, not positive,returns over that time. This isn’t the first time the stock market has shown negative returns over 10-year periods; it happened at least twice in the 20th century. So we should all be in bad shape, crying about our losses, bemoaning a lost decade—right?
Maybe not. As I look at client portfolios, I notice that almost all of them, despite their ups and downs, have done just fine over the last 10 years. But if the stock market has been negative, how can these portfolios have done well?
One possibility is that the portfolios have been swelled by new money going into them, through saving and investing. Undoubtedly such saving and investing has benefited some portfolios, but others have been growing as well. So new contributions into the portfolio can’t be the full explanation.
Another, more promising answer, is that the portfolios have been diversified. Perhaps 30%, 40%, 50%, or more of each portfolio has been invested in less exciting asset classes such as money market and Treasury securities. And these investments have been generating income, at the rate of 3%, 4%, or 5% per year.
Over 10 years, a $100 investment generating 4% a year will grow to $148. So even if the stock market has been negative, the interest earning portion of the portfolios has generated growth. Another part of the explanation involves rebalancing. To maintain a constant risk profile, I work with my clients each year to bring their portfolios back to the asset allocation targets specified in their investment plans. And because the value of different types of assets fluctuates in different ways over the years, plenty of rebalancing has been required. At most rebalancings, we take the excess money (the amount by which the value of a particular asset class, say international stocks, exceeds the target value) out of these appreciated assets and use it to buy assets whose value is below the target. This rebalancing often results in selling some types of assets when their price is high and buying others when their price is low.
The ups and downs of different types of assets over these 10 years have provided many opportunities to rebalance portfolios and often earn returns that may be better than those of the stock market. This compounding of interest over 10 years, and the buying low and selling high of a variety of asset classes, goes a long way in explaining why the last 10 years for most of us have been anything but a lost decade.
Boulder, CO
www.stewartfarnell.com
The investment research company Morningstar reported recently that the average return for the Vanguard Total Stock Market Index Fund Investor Shares for the last 10 years was −0.66%. In other words, the U.S. stock market has had negative, not positive,returns over that time. This isn’t the first time the stock market has shown negative returns over 10-year periods; it happened at least twice in the 20th century. So we should all be in bad shape, crying about our losses, bemoaning a lost decade—right?
Maybe not. As I look at client portfolios, I notice that almost all of them, despite their ups and downs, have done just fine over the last 10 years. But if the stock market has been negative, how can these portfolios have done well?
One possibility is that the portfolios have been swelled by new money going into them, through saving and investing. Undoubtedly such saving and investing has benefited some portfolios, but others have been growing as well. So new contributions into the portfolio can’t be the full explanation.
Another, more promising answer, is that the portfolios have been diversified. Perhaps 30%, 40%, 50%, or more of each portfolio has been invested in less exciting asset classes such as money market and Treasury securities. And these investments have been generating income, at the rate of 3%, 4%, or 5% per year.
Over 10 years, a $100 investment generating 4% a year will grow to $148. So even if the stock market has been negative, the interest earning portion of the portfolios has generated growth. Another part of the explanation involves rebalancing. To maintain a constant risk profile, I work with my clients each year to bring their portfolios back to the asset allocation targets specified in their investment plans. And because the value of different types of assets fluctuates in different ways over the years, plenty of rebalancing has been required. At most rebalancings, we take the excess money (the amount by which the value of a particular asset class, say international stocks, exceeds the target value) out of these appreciated assets and use it to buy assets whose value is below the target. This rebalancing often results in selling some types of assets when their price is high and buying others when their price is low.
The ups and downs of different types of assets over these 10 years have provided many opportunities to rebalance portfolios and often earn returns that may be better than those of the stock market. This compounding of interest over 10 years, and the buying low and selling high of a variety of asset classes, goes a long way in explaining why the last 10 years for most of us have been anything but a lost decade.
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