How Much Risk Is How Soon

Everyone else is losing their minds over the election, so I figured I'd deviate to something else entirely. I had a discussion with family members yesterday wherein, considering my long track record of detonating atomic bombs in my life, they figured my radioactivity-scarred body might hold some wisdom about money. Naturally, I spoke at great length and only stopped when I saw them making poorly-concealed throat-slitting gestures to each other.

The conversation branched all over the place, so I thought it worthwhile to encapsulate my thinking here.

Basic Philosophy

Money gives you freedom. It gives you freedom to make choices and freedom from anxiety. That's it. That's all it does. Pursuing it for its own sake is a path to madness. If you're doing that, stop it right now. Looking back on my life, I don't wish I had made or saved more money, I wish I had made or saved more relationships. Don't let it come between you and your loved ones. If they express financial anxiety to you about risks or getting a late start on investments, take them seriously. Believe me, those atomic bombs are e-x-p-e-n-s-i-v-e.

Why Dave Ramsey?

I like Dave Ramsey's baby steps. I don't think they're optimal, I think they're good enough and that's perfect for my philosophy. You can follow them, knowing they'll get the job done and not have to think about it after that. Here they are in detail, listed below in brief.

1. Save $1000
2. Pay off all debts, smallest to largest
3. Save 3-6 months living expenses
4. Put away 15% for retirement
5. Save money for your kids' college expenses
6. Pay off your home early
7. Party on, dude!

I've read a lot of criticisms about these steps and they all amount to finding ways to make your money numbers biggerer by some pointlessly incremental amount. I don't do that. All I want is a sensible plan that allows me to follow it and not think any more about it. My life isn't about money, my life is about raising cotton, photographing the stars, cooking fried foods and making my family wince.

Dave's plan is good enough.

Investments

How soon is how much risk. If you won't need the money for a decade or more, then you can cope with a lot of risk. If you might need the money next week, you don't want any risk. Risk means return.

Retirement

For retirement, I recommend SPX. The chart below tells you why.

You can see the Dot Com Bust, the Real Estate Bust and the Wuhan Flu Bust on this chart. All that matters is the start and the end. The busts can be safely ignored if your time horizon is 5-10 years.

Including the massive hit during the Great Depression in the 1930s, SPX has returned between 8% and 10% per year. Set it and forget it. Why are you thinking about money? Stop it. Go live your life.

Some people will recommend individual stocks. I'm not a fan of that because I'm too lazy to track them. My father was the greatest stock picker I have ever met, but he had an MBA from Harvard, back when they still taught things, and he spent the last 60 years of his life learning how to pick stocks. His returns regularly blew away the stock brokers who handled his investments.

If you want to spend time every day reading the WSJ after 5 years of getting an instinctive feel for financial statements, go for it. Me, I'm going to pretend I'm from Dixie in the kitchen and in the garden, y'all.

Emergency Savings

The cash you might need next week because boll weevils wiped out your crop or your neighbor had too much watermelon wine and plowed his F-150 into the side of your house ought to be in checking or savings. Forget the interest rates, just leave it liquid so you can pull it out. Emergency savings is there to sooth anxieties. Worrying about returns is more anxiety. Stop it. Admit that it will sit there and do nothing and go back to your life.

Bonus Suggestion: Take some time to write down your biggest fears. Is it fire, flooding, termites* or something else? Research what it will cost to cope with these so you can pick your savings level with confidence. Maybe beefing up your insurance policy makes more sense than stashing more cash in the bank. Insurance is there as a big-time backstop for your savings. In addition to being a grand national champion stock picker, my dad was a maniac for insurance for just that reason.

Saving For Big Purchases

This is a meh spot for me. I'm with Dave on this one. My intermediate investment was always to pay down my mortgage. I never tried out corporate or government bond funds as a 3-7 year investment because it was too much work. If I was saving for a $5,000-$30,000 purchase, I would simply put it in a savings account in the bank, separate from checking. I did that because, as Dave says, spending and savings are more emotional than logical. Money in savings, KT no touch! Money in checking, KT spend!

These days, neither checking nor savings earn a thing, so it's all a wash, but separating it provided the emotional discipline I needed. ... OK, I just checked Wells Fargo's rates for their Certificates of Deposit, wherein you stash your cash for a specified period of time and they are practically zero. CDs are a terrible investment.

I suppose that if you couldn't stand not earning a bit on your investment, you could put it in a bond fund. I never had the money available to do that, so it's not something I understand all that well. Shrug.

Summary

Pick a simple plan, like Dave's, and follow it. Then stop thinking about money and go live your life. Happiness is not correlated with money.

A 2010 study out of Princeton University found that there’s a correlation between happiness and wealth, to a point of about $75,000 per year. When people make more than $75,000 a year, their happiness doesn’t increase...

Lastly, people are more important than things, even green things made of paper with curvy, multi-digit numbers in the corners. Go live. 

* - Termites are no joke in SoCal. In the South, it's wood rot, near the wilderness in the Southwest, it's brush fires and up where the Yankees live, it's the double threat of bad food and sullen people.