I recently purchased a house and the mortgage company sold my information to a life insurance company. They gave us a call and now we’re a little overwhelmed trying to figure out how to “diversify our finances”. Should I get an accountant? Would he help me with this? We’re a little worried about the additional expense.
The first thing I can tell you Nicole no-last-name is that you probably don’t need to be worried about the additional expense of an accountant. Generally folks in your position hire an accountant because it saves them money. Generally, an accountant also only handles taxes or accounting. Some will give investment advice, and it can be a reasonable way to get it.
The second thing I can tell you requires a little bit of a story: In the nutrition and diet world there is no lack of self-professed guru’s who claim to know the best way for you to lose weight, or the foods that will keep you healthy. They extol the virtues of their particular diet plan. Claiming miraculous results, and always ready to cherry pick examples and studies which support their particular food-cult. If you’ve been steeped in American culture at all in the last 50 years its impossible not to have noticed the endless “now its good for you”, “now its bad for you”. The best nutrition advice I ever got comes from the book “In Defense of Food” by Michael Pollan:
1. Eat Food
2. Not too much
3. Mostly plants
This advice I found particularly wise because of its humility. Rather than making psuedo-scientific arguments about human diet instead it just tells the reader the simple rules that account for most problems.
The investment equivalent of these rules must be:
1. Buy assets
2. Keep fees low.
3. Mostly stocks.
A great way to drive me crazy is to talk about the “investment” you made buying a nice vacuum. There’s nothing wrong with vacuums, but you’re spending money. Investing means to part with money for the time being in order to generate income, while being reasonably certain of the safety of your principal. Buying gold, for example, doesn’t satisfy this first test, as Warren Buffet said it best in his annual letter to shareholders in 2011,
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices. A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Keep fees low
This is where whole life insurance generally fails, as well as funds with “loads”. When you have to pay someone thousands of dollars for an investment they refer to as a “product”, you’re fees are not low. Index funds, from say Vanguard, are a much better candidate. Your money is invested at a rock bottom cost. Sometimes 0.1% of your invested assets.
To be fair, this is perhaps the only piece of my advice that isn’t necessarily timeless. In 1999 it was probably bad advice, but in general it has been good. Over time stocks have been the best or one of the best performing asset classes in the world. It’s easy to see why this is the case. Stockholders are the ultimate owners of the businesses in the world. Gold doesn’t care if you make money or lose money. Insurance exists to protect you from disaster, not to make you wealthy. The raison d’etre of a business it to generate a profit for its stockholders.
Don’t fall prey to snake-oil salesmen. If you follow this advice I don’t promise millions, and I can’t promise that you won’t lose money. There will be times where you will lose hundreds of thousands of dollars. In the long run, however, if you stay invested and ride out the ups and downs of the market I think it’s very probable that you will enjoy a satisfactory return.