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Read the following entertaining quote from the 2011 movie, Margin Call (highly recommended if you enjoy the Wall Street drama genre):
”…it's certainly no different today than it's ever been. 1637, 1797, 1819, ’37, ’57, 1901, ‘07, 1929, ’37, 1974, 1987…1992, ’97, 2000, and now, [referring to the great recession of 2008] whatever we want to call this. It's all just the same thing, over and over. We can't help ourselves. And you and I can't control it, or stop it, or even slow it. Or even ever so slightly alter it. We just react and we make a lot of money if we get it right, and we get left by the side of the road if we get it wrong. And there have always been, and there always will be, the same percentage of winners and losers. Happy f***s and sad sacks, fat cats and starving dogs in this world. Yeah, there may be more of us today than there's ever been. But the percentages…they stay exactly the same.”
What’s the character talking about? Whether knowingly or not, he’s vaguely referring to the Pareto Principle, commonly known today as the 80/20 rule. It suggests (among other implications) that 80% of an outcome is often the result of just 20% of the effort you put into it. It also applies to many other related aspects of our existence. For example, 80% of the time, you wear only 20% of your wardrobe (we dare you to empirically test this). We know that this principle doesn’t always work. But, sometimes, it’s worth going the extra mile. Often, by prioritizing the 20% of your efforts that makes the biggest splash, you can reduce excess commotion as well. In that spirit, here are 4 financial best practices that pack a lot of value per “pound.”
1. Investing: Be There, and Stay There
You could do far worse than to invest according to a sentiment attributed to Woody Allen:
“80% of success is showing up.”
Going back to 1926 and after adjusting for inflation, U.S. stocks have delivered about 7.3% annualized returns to investors who have simply been there, earning what the markets have to offer over the long haul. Those who instead fixate on dodging in and out of hot and cold markets are expected to reduce, rather than improve their end returns. That’s because, when markets recover from a downturn, they often more than make up for the stumble quickly, dramatically, and without warning. Instead of chasing trends, simply stay invested over time.
2. Portfolio Management: Use Asset Allocation, and Don’t Monkey with the Mix
Asset allocation is about investing in appropriate percentages of security types, or asset classes, based on their risk/return “personality.” For example, given your financial goals and risk tolerances, what ratio of stocks versus bonds should you hold? What percentage of small value stocks versus large growth? How much domestic and how much international?
Both practical and academic analyses have found that asset allocation is responsible for a great deal of the return variability across and among different portfolios. So, to build an efficient portfolio, we advise paying the most attention to your overall asset allocation, rather than fussing over particular securities. And by the way, once you’ve got a personalized asset allocation in place, the only reason to change it is if you change. If you’re tempted to alter your allocations based on current market conditions, circle back to our first point. It can be an expensive endeavor for almost any investor to undertake changing allocations as it then relies on timing, which should only be undertaken with the most sophisticated of strategies and a heck of a lot of data.
3. Financial Planning: Do It, But Don’t Overdo It
Also in 80/20 rule fashion, an ounce of financial planning can alleviate pounds of doubt. It connects your resources with your values and priorities. It’s your touchstone when uncertainty eats away at your resolve. It guides how and why you’re investing to begin with.
Here’s some good, 80/20 news: Your plan need not be elaborate or time-consuming to be effective. In The One-Page Financial Plan, author Carl Richards describes:
“Your one-page plan simply represents the three to four things that are the most important to you: some action items that need to get done along with a reminder of why you’re doing them.”
If you’d like to do more, great. But even a one-page plan will give you a huge head start. Write it down, as Richards describes. When in doubt, read what you’ve written. Is it still “you”? If so, your work is done; stick to plan. If not, consider what’s changed, and update your plan accordingly. It can be that easy.
4. Financial Security: Freeze Your Credit Reports
Even the best-laid financial plans can be thwarted if your assets are exposed to financial scams and identity theft slams. Fortunately, there’s a lot you can do to secure what you most easily can. We’ve written a handy quick-reference guide on that here.
If we were to pick one practical, but often overlooked punch that delivers among the biggest blows to identity theft (at least here in the U.S.), it’s the ability to freeze your credit reports.
Freezing each of your accounts with the three major credit bureaus (Equifax, Experian, and TransUnion) is like locking the doors to your home or vehicles. It creates a few extra steps for you, as you’ll need to temporarily lift the freeze when you wish to take out an occasional loan. But it costs nothing to set up and manage. And if an identity thief does get ahold of your information, it should stop them cold if they try taking out lines of credit in your name. This strikes us as an 80/20 trade-off well worth making.
Building Lifetime Wealth, 80/20 Style
Properly applied, the 80/20 rule can help minimize the time and energy you have to put into maximizing your financial well-being. Whether you’re saving for retirement, funding your kids’ college education, preparing for a wealth transfer, applying for insurance, or otherwise managing your hard-earned wealth, we can help you identify and execute these and other actions that matter the most, so you can get back to the rest of your life.
Want to learn more? Give us a call today. Consider it part of the 20% of your efforts that should take you far.
