I set off from my last post ready to dive into Kapuscinski’s the Shadow of the Sun. This is no reflection of the book but I was quickly distracted. I was distracted by Canada’s looming 2009 RRSP contribution deadline. Every year I, like many others I’m sure, claim that next year will be different. Next year I will have a plan, I will be more on top of things.
Of course this year was no different; I was bombarded by TV commercials touting their own mutual funds/GICs etc before I had even given my own portfolio a passing glance.
Enter dad (no, not in the obnoxious dad-will-tell-me-what-to-do-or-give-me-the-money-to-do-so-kind-of-way). At the age of 12, my dad gave me the Wealthy Barber, at 16 it was How to Protect Your Nest Egg and at 20 is was the Power of Index Funds. For Christmas this year, my dad gave me The Little Book of Safe Money. I have to admit I kind of rolled my eyes when I got it; I figured I have the basics down pat by now and the title doesn’t exactly make it sound like a page turner.
Interestingly enough, this is exactly the reason a lot of people have trouble sticking to the guidelines laid out in this book: they are not exciting. There is no thrill, there is no gaming, no playing the market to gloat about to your friends. It’s hard to compare, “I just buy and hold index funds with an MER less than 0.75% while ensuring an appropriate asset allocation for my retirement goals” to “I took my tuition money in college and bought a penny stock on a whim. I dropped out of university but I sold the same stock when it was trading over $30/share and retired at 35.
I don’t know if any penny stock has ever become a major company but there are always stories going around that make you think, maybe if I just bought one lucky stock, I could retire early, have everything I ever dreamed of. For every story like that remember: the story-teller is almost assuredly exaggerating, for one ‘lucky pick’ there were surely many many unlucky ones and for every person who strikes gold many more come out with nothing but a handful of coal.
So, although this book did simply reaffirm alot of what I already knew, a lot of what my father had already impressed upon me relentlessly over the years, there were a lot of good take-homes.
1) Diversify. Okay, we all know this adage right? But, did you every think to include yourself as an egg in the proverbial basket? Well, the author of The Little Book of Safe Money, Zweig, thinks you should. You are the single most valuable asset in your portfolio: avoid putting your financial capital in the same basket as your human capital. This translates simply to, don’t heavily invest in your own company’s stock and do not invest in the industry you currently work in for if that industry starts to suffer you are more likely to lose your job or suffer a pay cut while also seeing your stocks plummet (just ask anyone at Enron if they would agree with this). As a hedge, why not invest in an industry that should do well when yours isn’t?
2) In addition to paying attention to asset allocation (generally percentage of income to growth funds) in your retirement portfolio, remember to ensure a level of liquidity. This equates to another method of diversifying. Cash, stocks, bonds, mutual funds and the like are generally the most liquid. If all of your money is in this form, it is time to start putting some in more illiquid investments, i.e. real estate. Conversely, if all your money is invested in real estate, you need to start putting some of it in more liquid assets.
Zweig goes on to discuss methods for cutting costs in your daily life, the psychology of investing, the danger of ultra etfs and more. I’m sure Mr. Zweig would appreciate if I stopped divulging the wise words of his book here. Moral of the story is: this is great read for anyone from an investment virgin to the most sophisticated investor (and judging from recent debaucheries such as the Bernie Madoff scandal, the more ‘sophisticated’ an investor you consider yourself, the more you would benefit from reading a book like this).