By Robert O. Weagley, Ph.D., CFP®
I am a member of the Columbia Northwest Rotary Club. A fellow member, Robert M. Doroghazi, MD, is on the editorial board of The American Journal of Medicine. This week he had copies of a letter he wrote to the editor of that Journal, entitled “A Candid Discussion of Obesity”, which will be published in an upcoming edition[i]. In it he writes about all the things we try to do in order lower obesity rates in our country. These include cutting back on soda consumption, eating less snacks and candies, changing the menus in our schools, removing “unacceptable” vending machines from our workplaces, not eating at fast food establishments, among other evaluations of the culture of obesity. He concludes, however, with the following:
….the best place to start is by simply telling the patient the truth. “Sir or Madam, it’s not OK to be obese. Obesity is bad. You are overweight because you eat too much. You also need to exercise more. Your obesity cannot be blamed on the fast food or carbonated beverage industry or on anyone or anything else. You weigh too much because you eat too much. Your health and your weight are your responsibility”.
I admit that this may not be true in every case but I will defend the right to believe that it is true in the majority of cases. Americans are obese. We eat too much and we exercise too little. While reading the article I could not escape thinking about how simple it is increase our net worth. Yet, how few people actually are successful in managing their money. At the risk of redundancy, I will restate a previous financial tip. The secret is DDT: Discipline, Diversification and Time. What do I mean?
You must have discipline. Discipline begins when you are young (if you are lucky). First, be disciplined in the investments you make in yourself. Your “human capital” is the only investment you have any control over. Take your education seriously and strive to excel, instead of “passing”. Find something you are passionate about and, to the best of your ability, become an expert in that area. Include exercise and athletics in this equation to secure a physical plant that keeps your human capital safe and healthy. Believe me, you will want to be able to use that body over a long, long period of time. Second, when you earn money, receive gifts, or even an allowance; save some. This is likely more than you are saving now. Keep saving money. Make it a point to believe that you will live long enough to need the money you are saving. As you’ve read in these pages before, take advantage of tax-advantaged retirement plans (IRAs, 401k, 403b, SEP, and others). Use coupons, shop sales, reduce your use of credit (especially for depreciating goods), purchase goods in their off-season, eat away from home less often, and the myriad of other ways you can cut back on your spending to build a future for you and your loved ones. If you don’t have the discipline to save, you will never gain financial freedom.
When you save money and you have some to invest, you must diversify your investments. Diversification has been covered by this blog dozens of times and suggested allocations appear in most popular financial media every day. Stop looking for the silver bullet investment that will correct for all the mistakes you’ve made in the past. It likely does not exist. Instead, be disciplined in your diversification and stick to your plan. It may have to be adjusted periodically (changed circumstances, as well as rebalancing), but do not “put all your eggs in one basket”. You may drop the basket or the winds of time can blow it from your hand. Diversification is the only practice known by the finance profession to reduce risk and increase the likelihood of reaching your goals[ii]. Once you have diversification, have the discipline to stick with it and to avoid the emotional mistakes that many “investors” make. They wait until the market is at a high price to have the “confidence” to buy and then wait until it is on sale to become “fearful” and sell.
Finally, time is on your side, regardless of your age. You will never have more time to live ahead of you than right now. For, by the time you finish reading this sentence, you have even less time. I am not trying to make you gloomy but I am encouraging you to begin as soon as possible. If you are a reader of this blog, you recall the impact that time can have on your savings goals. Let us say you have the goal of having $1,000,000 by the time you are 66 years of age and that you can earn 5% annual interest on your investments over time. You ask yourself, “How much do I need to save per month to reach my goal?” If you are 20 years old, the answer is $467 per month. If you are 30 years old, the answer is $829 per month. Finally, if you are 40 years old, the answer is $1,567 per month. The point is the following, it is much easier to reach our goals, the younger we are when we begin. Another fact is that, if you begin when you are young, you will likely continue to add to your monthly savings and acquire even more wealth. This wealth is money you can use to fund your goals for retirement, children’s college educations’, vacations, second homes, or whatever else you believe will add the greatest utility to your family and your life.
You see, there is no magic annuity, life insurance policy, small business investment, “work at home” scheme, or lottery game that will be the magic elixir to help you find financial peace. I am NOT saying that these have no value (except maybe the lottery). The similarities to dieting are striking. If we want to lose weight, there is no failsafe method to improve our health and self-image, other than reducing our food consumption and increasing our exercise. Like most things, it begins with you. You must have discipline to save. You should maintain diversification and insurances to reduce your exposure to risks. And, you must begin today. There is no magic investment with the certainty of providing you with the resources of your dreams. I will spare you a paragraph similar to Bob’s above. What I will say is that, just like losing weight, it must begin with you. The answer is so simple you may not be able to see it, until you look back with the satisfaction that comes from financial success.
[i] The Doroghazi article may be seen here: http://www.sciencedirect.com/science/article/pii/S0002934314008997 .
[ii] If you are a beginning investor, check out the low cost mutual funds and exchange traded funds (ETFs) that are offered by Charles Schwab, Fidelity, Vanguard, among others. Many of these can be purchased and no cost and have the industry’s lowest expense ratios. (Expense ratios are one more aspect of investments that you can control, just like the discipline you can choose to have in order to save and invest.)