“Working to help parents raise money-smart kids.”
Hello, friends!
I’m rereading Jason Zweig’s entertaining and insightful book, Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich.
I’m re-engaging with so many insights I think can help us on our money-smart journeys. I want to share with you “3 Ideas to Share & Save” inspired by Zweig’s wonderful book.
— 1 —
Dollar Cost Averaging: An oldie but goodie, dollar cost averaging (DCA) is a cornerstone smart investing strategy.
DCA involves regularly investing a fixed amount of money on a chosen investment. So rather than immediately investing a lump sum, you invest smaller amounts regularly and consistently. You can set a limit or just continue investing indefinitely. Automating this process (for example, $100 every 5th of the month) reduces the effects of random price swings. Sometimes we might be buying high and other times we might be buying low, but we’re not trying to time the market (something Zweig makes very clear we’re terrible at doing). By the way, so are the “experts!”
Though not a perfect analogy, this approach is similar to the way we buy gasoline for our cars. Most of us fill up fairly consistently, and by doing so we’re sometimes buying high and sometimes buying low. Our car’s tank size is fixed, so there’s only so much gasoline we can buy each time. Even if the price is thrillingly low, (Yes, thrilling. I live in California. People follow fuel fluctuations like they do the weather.) there’s a limit to how much we can be gouged by prices when they skyrocket.
Pair DCA with the idea of paying ourselves first and investing in low-cost index funds, and an argument can be made that we might not have to teach our kids anything more about investing.
The summer is an excellent time to introduce the idea of DCA. If your teen has a job, you can even incentivize them to invest a portion of their income by matching their investment. You can do this in a traditional investment account or, even better, a Roth IRA.
— 2 —
Invest like a Roman Emperor: “The happiness of your life depends upon the quality of your thoughts.” ―Marcus Aurelius
Emperor of Rome in the second century AD, Marcus Aurelius, the “Philosopher King,” is perhaps the most famous Stoic. The Stoics urged us to control only what we can control. While we can’t control outcomes, we can always control our emotional reactions to those outcomes.
For example, idea #1 above: Dollar Cost Averaging (DCA). We can’t control the market swings, but we can control how we invest in the market in a way that limits those emotions of ours that often get in the way of making sound choices.
Here are some additional strategies from Your Money and Your Brain that might be worthy of a Philosopher King (and which are certainly worth a conversation with our kids):
Think twice or sleep on it: A great investing idea will still be a great investing idea tomorrow or even next month if your horizon is long-term. And if our horizon is short-term, we might be better off explaining to our kids that we’re gambling rather than investing.
Be stingy with the fees: John Bogle was a pioneer when he launched Vanguard to bring low-cost index fund investing to the masses. Two decades before Vanguard, Bogle wrote his Princeton senior thesis about how little value so-called “experts” brought to selecting investments. “Decades of rigorous research have proven that the single most critical factor in the future performance of a mutual fund is that small, relatively static number: its fees and expenses.” – Jason Zweig, Your Money and Your Brain
Fees are pernicious because they eat away at our gains. Which is why Bogle promoted index funds that didn’t rely on so-called experts and simply followed the market.
Beware of pundits: When you encounter a pundit, whether she is on social media or he is a friend promising riches, be very wary. Remember, extraordinary claims demand extraordinary evidence. If you ask for the evidence – really peel back the onion for the why – you’re likely to discover the “evidence” is based on short-term trends, mistaking correlation for causation, or worse, the person just has a hunch.
Ultimately, beware of pundits because…
— 3 —
Pundits don’t know sh*t: I love to read, and I enjoy diving into a good biography. If you’re like me, then you’ll love David Senra’s Founders podcast. Senra reads and shares learnings from biographies weekly, and while it is no replacement for reading the actual books, it’s a close second. It allows me to explore more texts, albeit from another’s point-of-view.
Senra created a recurring segment called “Critics Don’t Know Sh*t.” In each segment, he shares a story featuring one or more critics who were sure the founder being profiled would fail. For example, most of his peers thought John Bogle was crazy to start Vanguard.
As a species, we’re terrible at predictions. At least one reason this is true is that we’re natural storytellers and we can fashion a story out of pretty much anything. And people who are paid to make predictions – “pundits” – are generally no better than monkeys flinging darts. They might even be worse since they are typically overconfident due to their role as pundit.”Just a couple of accurate predictions on CNBC can make an analyst seem like a genius, because viewers have no practical way to sample the analyst’s entire (and probably mediocre) forecasting record.” – Jason Zweig,Your Money and Your Brain
Wouldn’t it be great if there were a browser extension that superimposed a scorecard displaying the correct prediction percentage of any given pundit? Of course, there’s a reason why the major financial networks don’t do this themselves. And that’s because…drum roll please…
Pundits don’t know sh*t!
Let’s teach our kids to be uber-skeptical of talking heads. It applies as much to TikTok as it does to Fox Business News, CNBC, or for that matter, ESPN.
I’ll leave you with one last nugget that I pulled from Your Money and Your Brain.”Never confuse brains with a bull market.” – an old Wall Street saying
Enjoy the journey!
John, Chief Mammal
P.S. Please consult with a financial or investment professional before engaging in any decisions that might affect your own financial well-being.
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