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According to this Bloomberg article, the number of U.S. households that will be severely cost-burdened (i.e., spend at least half their income on rent) will increase 25% over the next decade.
Even more troubling is that only a 2% inflation rate can produce these results.
First I Digress...
Prior to a career in investment management, I worked in Silicon Valley. As an R&D engineer, I deployed sophisticated computer algorithms to solve essentially “unsolvable” (called “NP-hard” or “NP-complete”) computer problems.
Yet, my personal finance decision-making was rudimentary at best:
- I had a well-paying job, a checking and savings account, a company sponsored 401k, and minimal loans.
- In my quest for a higher return on my savings, I opened a 5-year CD.
- When I saved some more, I did what many Americans do - I bought a nice car.
- When I had more discretionary income, I began to use some to "play" the stock market. I began acting on stock “tips” from friends and even famous TV personalities. When my stocks fell 10% or more, as they invariably do if you hold them long enough, I promptly sold them.
Dumb Things Smart People Do When It comes to Retirement Planning
- Not using investment as an offensive tool to accumulating wealth: Investment for wealth accumulation is playing defense (saving and paying off loans) as well as offence (investing to keep ahead of inflation). Investing is neither gambling nor speculation.
- Not making a financial plan: Quick, how much do you spend on food in a year? If you don’t know then maybe it’s time to make a financial plan. It’s a pity that personal finance is rarely taught at the college level. In my personal finance class, I see the light bulbs go on, when my students see the power of compounding: how a $1,000 investment can grow to more than $3,000 over 30 years compounding at 4% per year (and to more than $10,000 over 40 years compounding at 6%).
- Not opening an IRA or an investment account: Many working professionals think if they have a company-sponsored 401k they don’t need to open a tax-deferred IRA or an investment account. Wrong! You can still benefit from long-term tax-deferred capital appreciation. Remember, there are few substitutes to investing early for long-term wealth creation.
- Believe investing is only for the rich or the retired: It doesn’t take a lot to begin the investment process. You can start small and grow your investment over time. If you don’t have the time to invest, buy an index-fund, a no-load mutual fund or hire a money manager you can trust. It is worth noting that over the last 10 years, the S&P 500 is up almost 60% (not including dividends), even with the volatility created by the financial crisis of 2008-2009.
- Too much emphasis on stock price Volatility and not enough on Risk:
- Risk, the Rodney Dangerfield of Portfolio Management: Risk is the exposure to a permanent loss. To use a somewhat extreme example, when the coal company, Alpha Natural Resources (ANR) filed for bankruptcy, and the stock price lost almost 100% of its value, that would qualify as risk of permanent loss. To mitigate risk requires homework to understand the businesses that one invests in.
- Volatility, the “brood parasite” of Portfolio Management: "Volatility" is often used "interchangeably" with risk even though they are very different. Consider this example: Since 2011, Apple (AAPL) shares rose from $50 to $100 in 2012 before falling to the mid-$50s in 2013 and then rising back up to above $100. It is worth noting that while the share price moved a lot, the underlying business value has not changed that much. This is an example of volatility. Volatility is usually driven by uncertainty and the fear and greed of market participants. Managing for volatility, which can sometimes lead to “buying high and selling low” is rarely the optimal way to manage one’s portfolio.
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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Burr Capital LLC), or any non-investment related content, made reference to directly or indirectly in this research will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this research serves as the receipt of, or as a substitute for, personalized investment advice from Burr Capital LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Burr Capital LLC is neither a law firm nor a certified public accounting firm and no portion of the research content should be construed as legal or accounting advice. A copy of Burr Capital LLC’s current written disclosure statement discussing our advisory services and fees is available for review upon request.