The Beauty of Budgeting

We tend to think of budgeting as restrictive as best, and an overwhelming pain in the butt at worst.
It’s not fun to put limits on spending. Obviously, money is a finite resource, an empty checking account or a maxed out credit card is limiting, but for whatever reason, a budget feels more limiting. Maybe because when you put together a budget you’re assigning the limitations to yourself instead of letting the limitations set themselves. A budget is a self-imposed threat to our comfortable spending habits.
Budgets can also seem overwhelming, even panic-inducing. First of all, who wants to try to tack every purchase? Second, who would want to know where the money went if you did? A budget does take work, maybe not the life-altering amount of work you think, and definitely less work today with all of the additional tools, but it does take work. Unfortunately it’s also fairly detailed work, and overall it seems like way more work than it’s worth.
So budgeting is basically the worst, we know it’s something we should be doing, similar to pulling a painful tooth, but we avidly try to avoid it. Well, I’m here to tell you that budgeting is actually pretty great.
Here’s a question, how many big, fun, purposeful purchases have you made recently? I don’t mean financed, I mean purchased with real money. Vacation package? Weekend trip? New tech gadget? Large gift? If you’re anything like pre-budget me, the answer is depressing. How are you supposed to afford big purchases, let alone big fun purchases, when you’re just trying to keep your head above water?
Here’s another question, how many of your small, seemingly insignificant, comfortable purchases can you remember? Lunch out a few times last week? Starbucks? An extra treat from the grocery store? Again, if you’re anything like pre-budget me, the answer is depressing. You probably can’t even remember most of the whimsical purchases you made last week let alone last year.
These questions epitomize a problem, we don’t think long-term very well. But budgeting is an antidote.
Budgeting helps you spend money on things you actually really want or need instead of spending it whimsically on things you don’t really care about and definitely don’t need. Budgeting forces you to prioritize what you use your money for, it necessarily brings intentionality to your finances. When you start your budget, you’ll get to think about how you want your future to look as it relates to money. And not only that, you’ll begin to see that said future is attainable! You could actually take a weekend trip with your spouse, or bring your family on vacation, or get a new phone! You do have to give a few things up but those daily lunches which were only good for widening your waistline anyway. Budgeting is actually the opposite of restrictive, it’s freeing; now you’re setting the priorities instead of letting whimsy run your life.
Budgeting also starts to help you think differently about the future. Just about anything is possible with enough time and consistent effort, your budget is evidence. Start saving $50/month and a year later you’ll be about ready to book a nice weekend away. Start reading a book 30 minutes a day and you’ll be well on your way to reading 50 books in a year. Start budgeting daily time to your passion project and soon you’ll be quitting your job!

Don’t quit your job, at least not yet, just get started on that budget.

You Should Get an Apple Watch

If you haven’t undergone the Apple Watch experience, and it is an experience, let me tell you how it works:

At its most basic level, the Apple Watch is a fitness device. Sure, it includes all the extra bells and whistles, probably the best bells and whistles, that a modern smartwatch has to offer, like text and email and phone call notifications (so fun to ignore calls from my Apple Watch). You can check the weather which is handy. It’s got a timer app which I use a lot more than I thought I would. The calendar widgets add some convenience. Those things are all cool, but they’re the outer layers of the onion. Keep peeling back and you’ll find a physical activity monster at the core. Apple calls it the Activity app which sounds fun, because who doesn’t like activities? Well, these activities aren’t the fun kind. The Activity app tracks three things: active calories burned, exercise minutes, and number of hours you stood (you don’t have to stand for 12 hours, you just have to stand for one minute per hour, for 12 hours). It also sets daily goals for each of these categories, of which you can only customize calories burned. The exercise goal is set to 30 minutes per day, and the standing goal is for 12 hours (again, you only have to stand for one minute per hour). It communicates your goal progress through one little three-ringed circle. Oh, the agony one little digital circle can cause. As you burn calories and exercise and stand, those three rings slowly fill with color. Your job is to make sure all three are filled up, or closed, by the end of each day.

For the first few days, this is exciting. It’s really fun to watch those little rings close, and it’s way more satisfying than it should be to see the whole circle filled. You can go back to see your history in month blocks, plus Apple offers neat little badge things for miscellaneous accomplishments and challenges. No, not real badges, you can only see them in the Activities app, but still. If closing the rings wasn’t motivating enough the badges will surely get you moving.

After the honeymoon period is over, reality will set in. I’m a competitive person, lots of us humans are, and when one or more of those circles aren’t closed I feel like I’ve lost, which is obviously unacceptable. So every day, my number one priority has become closing those rings; if everything else I do fails, at least I have this. Within the first month or so I began to realize just what I had signed up for. This Apple Watch experience isn’t just about ignoring phone calls from my wrist, it’s actually about taking over my life. In order to earn (achieve? accomplish?) one of the available badges, you literally need to close every ring, every day, for an entire month! If that’s not a takeover, I’m not sure what is.

The Apple Watch promotes a type of maniacal addiction to exercise. I’ve developed habits I wouldn’t have dreamed of five years ago in order to facilitate the obsessive-compulsive urges this device inspires within me. My body hurts, my mind is exhausted, but those digital rings on my wrist are closed and it’s all worth the relentless pursuit. Side note, I’m in surprisingly good shape.

You should get one!

When’s the Next Market Crash?

Full disclosure, I don’t know, but don’t stop reading! The thing is, that’s a bad question, or at least the wrong question. No one knows when the next market crash will be. We’re pretty sure there will be another one at some point because that’s how the market works, but instead of trying to figure out when, let’s work from what we know:

1) We know that the market moves based on new news and people’s emotions. Neither of those things are predictable in the future. We don’t know what’s going to happen tomorrow, what news will come out. And we especially don’t know how people will feel or how they’ll respond to unknown things in the future. So, we know that we don’t know what the market will do tomorrow or anytime in the future. Make sense?

2) We know that the general stint of the market is up, way up. We know that for people who don’t freak out about the next crash, who instead stay invested through the bumps, the average returns are really amazing (to the tune of 10+% per year!). 

3) We know that when the market does crash it takes an average of about 4 months for it to bounce all the way back. The average crash takes about 4 months to hit the bottom, and 4 months to come back. For those keeping track, that’s a total of 8 months for the average crash. 

4) We know that over the last 93 years (that’s as far back as the super-reliable data goes), 68 of them were positive by an average of 21%. That leaves 25 negative years, which were down by an average of 13%. Who doesn’t want to sign up for those odds!

5) We know that people get real nervous about the market. On average, people jump advisors and funds every 3.5 years. And we know that’s not a winning strategy. 

6) We know that bonds are much less volatile than stocks, but that they also return significantly less than stocks. So, when you’re young, you want to own mostly stocks. You want your money to grow, and crashes don’t matter too much because you’ve got plenty of time to let the market bounce back. If you’re older, you might need more of your money in bonds because the bonds won’t dip like the stocks will in a crash. Bonds can reduce the volatility in your portfolio when you need the funds to be there.

7) We know that good advisors have a profound impact on people’s returns. Instead of encouraging clients to try to figure out when or what is going to happen next, they help clients stick to the plan, even when the market seems scary. 

So we don’t know when the next crash will be. But it actually doesn’t matter, not if you have a good advisor, a good understanding of the market, and a good plan. The timing of next market crash should actually be the least of your worries; but if you must worry, at least worry about something a little more worrisome. 

3 Questions to Ask your Financial Advisor

Your investment advisor is a very important person. You rely on this person to help you navigate your lifelong financial journey, and hopefully guide you to a successful outcome. There are obvious characteristics we want in an advisor: integrity, honesty, diligence, etc., all good things. But there are other, almost equally important things most of take for granted in an advisor: What’s their investment strategy? What’s their view on the market? How do they expect to help you capture returns? These are questions we don’t tend to ask, after all, they’re the professionals, but the answers to these questions will have a profound impact on your future.

  1. Do you think the market is efficient or not?

This is a simple question with massive implications. Basically, you’re asking whether or not your advisor thinks he/she can consistently get you better returns than the market by actively buying and selling stocks (stock picking), moving in and out of different market sectors (market timing), and using funds with the best recent return history (track-record investing). If the market is not efficient then these are valid exercises. An inefficient market means that stock prices could be underpriced or overpriced and assumes that smart advisors should be able to figure out which stocks are which and pick the ones that will outperform all of the others. Unfortunately, advisors don’t consistently beat the market, they can’t consistently pick the winners. The results of choosing stocks and timing the market have been overwhelmingly negative and research has resoundingly supported the assertion that the market is actually efficient (Efficient Market Hypothesis). An efficient market means a stock is never overpriced or underpriced, its current price is always the best indication of its current value. If the market is efficient, that means it’s impossible for anyone to consistently predict or beat it, in fact, attempts to do so are more like gambling than investing. Instead of trying to outperform the market, the goal should be to own the whole of it as efficiently as possible. This brings us to the next question.

2. What Asset Classes Do I Own?

In order to efficiently own the market, you need broad diversification. That means you want to own many companies, but more importantly, you want to own many companies in many different asset classes (large companies, small companies, value companies, international companies, etc.). When you ask, most advisors are going to tell you that the large majority of your money is in Large US Growth companies (S&P 500), which is unfortunate because the Large US Growth company asset class is one of the lowest returning asset classes in history. That’s not to say the asset class is a bad investment, it’s great for diversification, but it’s certainly not where you want most of your money. Small and Value asset classes return better over time, so you want to ensure you’re broadly and significantly invested in those asset classes.

3. How will you help me capture returns?

There are three important components to successfully capturing returns: 1) diversify, 2) rebalance, 3) remain disciplined. Diversification (1) means you’ll have ownership in companies of all different shapes and sizes all over the world. Good diversification does two things for an investor: it reduces risk/volatility and increases return. Since we don’t know which sectors or stocks will do best this year, we own all of them, and then we rebalance, which brings us to point 2. The goal in rebalancing (2) is to keep an ideal percentage of each of the different asset classes in your portfolio. Since stocks and asset classes don’t all move the same way every year when one asset class is up and another is down your portfolio percentages get out of whack. That’s where rebalancing comes in. In order to rebalance your portfolio, your advisor will sell some of the asset class that went up and buy some of the asset class that went down, bringing the percentages back into alignment. This must happen systematically, for example, it could be every quarter, in order for it to be effective. The end result is that you’re automatically selling high and buying low. There’s no gut instinct, no guessing, no market timing, it’s committed disciplined rebalancing, which brings us to point 3. Discipline (3) isn’t something that comes naturally to most of us, but it’s extremely important in capturing returns and planning for your future. There’s a behavior element that all of this hinges on, if an investor doesn’t have the discipline to ride out the ups and downs in the market they can’t be a successful investor. The average investor switches advisors and funds and strategies every 3.5 years, that’s a losing game. So how will your investor help you stay disciplined and on track to capture those returns and achieve your goals?

Since I’m writing this and I’m an advisor, you probably assume I’ve got answers to these questions, your assumption is correct. But this isn’t just a sales pitch, good answers to these questions are critical for successful investing, and far too many people simply have no idea what their advisor is doing for them, whether good or bad. So ask a few questions!

Why can’t you get that good habit to stick?

I’ve been reading The Power of Habit by Charles Duhigg, and this writeup is an exploration of a few ideas I found there. Side-note, it’s a really great book.

First things first, let me show you what Duhigg calls a ‘habit loop:’

A habit involves a cue, something that tells your habit to kick in; a routine, what you actually do; and a reward, what that action does for you. Here’s a quick example: when I hear my phone buzz I pick it up and check the notification which makes me feel like I’m on top of things. The cue is my phone buzz, my routine is to check the notification, my reward is to feel like I’m accomplishing something (I just love to see those red notification dots go away!). For better or worse that’s a habit, I do it without even thinking.

But what about when we want to create a new habit? It’s probably not currently a habit because it’s hard or painful or generally not fun. Checking notifications is one thing, it’s a habit I basically fell into because it’s easy. But we want productive helpful habits right?

So it’s the new year, and you’ve resolved to get up earlier every morning to hit the gym, a very productive and helpful habit. And you did, a few times, like January 2 through 4, but then it was cold and you missed a day. But you don’t give up that easily, you got back to it for a day or two, but then you were tired and it was the weekend and who gets up early on the weekend anyway? The next week you only made it to the gym twice, but you did wrestle with yourself to get out of bed a few other mornings. By the third week, it’s clearly not working and you’ve basically given up on the whole morning workout thing. Maybe you’re just not a morning person. But that would have been such a great habit, why couldn’t you get it to stick?

Duhigg recalls a study that was conducted with older folks coming out of knee or hip replacement surgery. Those surgeries are no walk in the park, and they require tremendous amounts of painful physical therapy to recover completely. The study required some of the participants write down their therapy plans while the rest didn’t do anything differently, everything else between the two groups was exactly the same. As you can guess, the group who wrote things down recovered much more quickly, two to three times faster than the other participants. It didn’t happen by magic, and the point isn’t just that you need to write your goals down, though that’s not a bad idea, the trick is in how they built habits.

For most of us humans, our willpower is about as reliable as a hedge fund’s returns (not very reliable). But it turns out that willpower is an essential component of creating a new habit. The cue is easy, the alarm goes off; the reward is obvious, more energy and a rockin’ bod. But the routine, actually getting out of bed when it’s dark, going outside to your car when it’s cold, wandering around the gym with people who look like they know what they’re doing, breaking a sweat at the crack of dawn, can be tough. That takes some willpower, which, again, isn’t our most reliable skill. This is where the hip-replacement story comes in. Those folks who wrote down their therapy plan didn’t have more willpower than the others, they weren’t even thinking about building habits, they were just following the instructions of the study. So what did they write? Interestingly, the common theme was a focus on pain points or difficulties in their routines where the temptation to quit would be most acute. The writing forced them to specifically confront those hard parts in their routine and make a plan to overcome them. They unknowingly designed their own ‘willpower habits,’ as Duhigg refers to them.

So here’s a quick takeaway: instead of intending to get up early and go the gym (or insert whatever habit you’d like to incorporate here), what if we specifically think about the pain points, write them out, and determine ahead of time what we’re going to do or think when the pain happens? After the habit cue, what’s the first thought or feeling that submarines your routine? Make a small plan for that specific thing. Then take the next one, and the next one, until all of the excuses and obstacles give way to a new habit. If it’s good enough for those elderly folks striving to walk again, it ought to be good enough for me.