Newsletter – 2020 Q3 – Don’t Let Politics Derail Your Plan

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Tom’s Quarterly Reads

Here is what I’ve been thinking about, plus the best articles I read over the past three months, mostly all finance-related. Your feedback is always welcome, and please share this with anyone else who might be interested. Subscribe here.


Just Read This

How Much Lifestyle Creep is Okay? (Of Dollars and Data): “I believe that some lifestyle creep can be very satisfying. After all, what’s the point of working so hard if you can’t enjoy the fruits of your labor? But … there is a limit to how far your lifestyle can “creep” before you start affecting your financial future.”


Tom’s Thoughts: Don’t Let Politics Derail Your Plan

Now seems to be a good time to invoke Rudyard Kipling: “Oh, politics is politics, and investing is investing, and never the twain shall meet in my financial decision-making.” Or maybe that was from Dr. Seuss; I was never very good in English class. But the point stands: never let your political views impact your investment decisions.

Studies have shown that political views do impact financial decisions, and this applies to all of us. (If you think it doesn’t consider starting here and coming back later.) Further, Kempf and Tsoutsoura found that “The effect is more pronounced in periods of high partisan conflict and for [those] who vote frequently.”

Humans are bad at forecasting in general, but possibly one of the most interesting and relevant biases is that we’re bad at predicting futures we don’t want to see happen. And when we’re proven wrong, we tend to look for proof that the evidence is wrong instead of changing our views.

Having a diversified investment portfolio is a goal at any time, but it makes even more sense to have a well-constructed portfolio in place before the election, because having that structure in place gives you more confidence to ride out whatever might happen in the markets. If you don’t have a plan, it’s much easier to succumb to the emotions and fears that short-term news can provoke. And what if the results of the election are contested one way or the other? It’s a sample size of one, but the last time election results were contested, the market did nothing other than follow the general trend it was already on. (Tip of the cap to Blaire, who is another fantastic advisor in New Orleans.) Have a plan, and stick to it.

And regardless of which side of the aisle you sit on, or if you’re standing in the aisle, or if you’ve stood up and walked outside, keep these two tips in mind:

  1. Don’t assume you know what political outcome will occur – and be most wary if you project the outcome you want.
  2. Definitely don’t assume you know how markets will react to your projected outcome.

And yes, this has largely been a rehash of something I wrote almost two years ago – but it bears repitition.


Personal Finance

3 keys to building an emergency fund (Vanguard): An emergency fund is key to weathering financial storms without having to rely on any outside agency. This article makes an interesting distinction between income shocks and spending shocks when considering how best to prepare for emergencies.

The Economics of Homeownership (Animal Spirits): A good podcast that those who own a house, or are considering owning one, should listen to.

What’s The Best Investing Advice Parents Can Give Teenagers? (Tony Isola): “Explain the concept of compound interest and help them open up a Roth IRA. It’s that simple.”

Alternative Forms of Wealth (Collaborative Fund): Finding ways to define wealth outside of the strictly monetary arena are important. Two of my favorite from this list:

  • You have enough time to prioritize eight hours of sleep with stress levels low enough to allow sleep.
  • You can say, “I have no idea” when you have no idea.

Two other ways to think about wealth I saw recently are never having to spend time with a-holes and MJ saying no to an easy $100 million. (The MJ article headline overlooks the name and image rights that the money is really paying for, but we all have a price on our time, endorsement and reputation.)


A Picture is Worth 1,000 Words

Americans Stayed Inside Even as Cities and States Reopened (Bloomberg): The article is interesting in general, but what I found particularly striking – if also unsurprising – was the chart showing a strong correlation between income and working from home.

Structural Diversification for All Seasons (Invest Resolve): This article as a whole goes under the category of “investing deep dives”, but the idea that the general economic situation at a given moment can be classified into regimes based on economic growth and inflation s an important one. Further, once you decide what economic regime we are currently in, there are particular investment assets that tend to perform best in that regime.


Investing

How To Win $1,000,000 (Trace Wealth Advisors): “If I asked you to construct a portfolio that would automatically underperform an index, there’s no guarantee that you could do it. This is the simplest explanation for the presence of luck in investing.”

What Risk Isn’t (Of Dollars and Data): In investing, the terms risk and volatility are often used interchangeably. However, I’m in agreement with this article in looking at those as two different things: volatility is the value of investments jumping up and down, while risk is the probability of not achieving your goals.

5 Thoughts on a World with No Yield (A Wealth of Common Sense): Interest rates are extremely low, and could remain that way for a long time. Some good food for thought here on what that means.

Public to Private Equity in the United States: A Long-Term Look (Morgan Stanley): An extremely detailed piece that looks at public markets (stocks you trade at a brokerage like Apple) and private markets (venture capital, etc). Understanding the difference and what drives private market returns is particularly critical as private equity funds slowly enter workplace retirement plans like 401(k)s.

Wall Street’s Crypto Cold War (Institutional Investor): Large financial institutions have been wary of cryptocurrencies, but some seem to be warming up to the idea. Key drivers of this shift appear to be the growing familiarity with cryptocurrencies, plus investors of all types seeing the promise of huge investment returns. What remains unclear is the impact of large institutions entering the space, where they will throw large amounts of money around but also call increased attention to the assets – luring more dollars but also raising the levels of public and regulatory scrutiny.


Thankfully, Claire loves going to daycare, which means mommy and daddy can actually get stuff done around the house!

Thanks,
Tom


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