Monday, January 19, 2009

An Optimistic View

I recently finished reading Simple Wealth, Inevitable Wealth by Nick Murray. Murray has more than four decades of experience advising investors and investment advisors. His book is expensive but quite brief and easy to read. He deals mostly in core principles. There is little fluff.

In this time of economic turmoil, many of us are reeling from the loss of a decade worth of value in our 401k accounts. Many are running away from stocks (equities) for (supposedly) safer havens. Murray says that this is exactly the wrong thing to do. One of the secrets to developing a nest egg that will outlive you and your retirement years is sticking to principle, avoiding emotional responses, and staunchly refusing to do what everyone else is doing.

Murray strongly advises that you find a good long-term financial advisor. He provides information for interviewing potential advisors. This person’s major job, says Murray, is not so much to pick your funds as to prevent you from making one or more of the eight mistakes investors commonly make that prevent them from reaching their investing goals.

Throughout the book, Murray repeatedly demonstrates that the major cause of investment underperformance is not the performance of the mutual funds involved, but rather faulty investor behavior. Most people try hard to control factors beyond their control — all of which amount to 10% or less of their investing outcome. They should instead focus on the one thing they can control: their own behavior. This constitutes 90+% of individual investment outcomes.

Some of the basic rules Murray lists include:
  • Only put long-term investments in equity funds. Savings for short-term needs should be kept in less volatile instruments.
  • When it comes to long-term financial goals, volatility is your friend; not your enemy. Murray’s discussion of Dollar Cost Averaging is a gem. Expect nasty long-lasting bear markets. Don’t panic.
  • Business ownership (equities) is actually safer in the long run than lending (bonds) due to inflation.
  • Make a reasonable plan (he provides a very simple formula) and follow the plan. Adjust as necessary. Be the tortoise, not the hare.
  • Avoid the big mistakes most people make. Most of the mistakes Murray lists have nothing to do with reason and everything to do with emotion and/or ignorance. Everyone would end up well off if this were so easy, but we all face a nearly overwhelming culture that pushes us to do the wrong thing. This is where a good advisor ends up being worth far more than you will ever pay him/her.
  • When it comes to investing, journalism is your enemy. Financial journalists are in the business of generating sales of their wares; they are not in the business of helping you produce wealth. Murray says that financial journalists almost always have the wrong focus and consistently get the important things wrong.
  • When everyone (journalists, pols, pundits, your friends, etc) start using the same terminology to describe financial or economic matters, you can be pretty sure that groupthink is going on and that the conclusions reached are wrongheaded and detrimental.
If you only read the six-page epilogue in Murray’s book, the cover price would be worth it. Murray titles this chapter Optimism is the Only Realism. He writes:
“No one can plan for the future — much less invest successfully in it — without believing in that future. And this becomes my working definition of optimism: an abiding faith in the future.

“And I’m not speaking here of starry-eyed optimism or blind faith. I don’t advocate hope for the future in spite of present reality, but because of it. …

“Pessimism, on the other hand, is deeply counterintuitive, because no one examining history would arrive at a declinist worldview. Thus, for me, pessimism is a lot like race hatred: no one would ever generate it spontaneously. Someone has to teach it to you.”
Murray notes that there have always been reasons to take a dim view of the future. And there have always been reasons to dump equities and run for financial cover (to a faux security). There is always a reason why this time is different than all those other times. But it really isn’t different. The media makes money off of selling doom and gloom. But we don’t have to buy it.

None of this is to say that there aren’t problems — serious problems that need to be addressed. And this does not refute my millennial religious beliefs, which I believe square with optimism when proper preparation is involved.

Murray’s book is an interesting, easy, and quick read. It is also eye-opening. I think that anyone that is interested in a decent retirement would benefit from considering what Murray has to say.

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