Invest in Yourself

The other day, I was asked what my investment advice for a 65-year old would be? My reply: “Go to the gym and watch your expenses.” To create wealth and/or preserve it for a future generation, all too often do we lose sight of the big picture. Let me explain.

Most of us invest because we pursue long-term goals, even if the means of achieving them differ greatly. This long-term goal tends to be saving for retirement; for those who can, it might extend to save for a future generation; or, for institutional investors, there might be an infinite investment horizon.

To serve investors, we have a massive industry paid in basis points of assets serviced or commission on products sold. In my humble opinion, our industry is ill equipped to provide advice that falls outside of those parameters. Here are a few of those:

Go to the gym. Seriously. You don’t need to be a wizard able to dissect financial statements to appreciate that your own earnings potential is the one you might have most control over. You have more income options at your disposal if you stay healthy until an old age. While there are limits as to how much we can control our health, it is an aspect of our lives that many of us could easily improve. If you want “diversification” in your portfolio, investing in your own health is something you might want to add to your list. If you manage an endowment, this may not apply, except that sending your board of directors to the gym may not be such a bad idea either.

Watch your expenses. Even more seriously. In an industry offering services on what to do with your hard-earned money, there is too little emphasis on reducing expenses. Businesses and people typically don’t go out of business because of a lack of revenue; they typically go out of business because their expenses are too high relative to their revenue. College students can live off barely any income, but somehow, we all pick up a boatload of recurring expenses as we grow older. The same applies to institutions: for example, donations may lead to new buildings, but those buildings need to be maintained. Most institutions, at least, have formal budget plans.

When an individual goes to a financial planner, they may be asked about their retirement spending habits. I allege that just as many have very little appreciation of what “risk” in a portfolio means, few know how their expenses will evolve once they retire.

May I propose that you analyze your current spending habits to better understand how your spending may evolve? Your current spending discipline may speak volumes about your future spending discipline. To give an example: a good fifteen years ago, I discussed spending habits with two investors: both had a family, both lived in affluent neighborhoods; one of them had about four times the income of the other one. Yet, the person with the more modest income saved more each year than the high earner. And guess what: today, the high earner continues to splurge most of his money while the more modest person has continued to prudently build his retirement nest egg.

There are plenty of models on how much you might be spending in retirement. Adjusting one’s expected future expenses based on a frank assessment of one’s own character might make the exercise more realistic. And the more seriously one takes the exercise of assessing one’s spending habits, the more likely it is that one can actually learn to manage those expenses.

Be a role model for your kids. Financially that is. If you want to save for the next generation, live by example. How can you expect your children to live within their means if you don’t? Financial education is good for everyone, including children. Let’s assume for a moment you are fortunate enough to be able to leave something for the next generation, wouldn’t you want them to also preserve the wealth for the following generation? A good starting point to raise them without feeling entitled may be to teach them about the value of money; and while a lesson on monetary policy wouldn’t hurt, such knowledge doesn’t matter if children do not understand how to keep their expenses in check. And that, in turn, may be difficult if their parents can’t do this.

What does this all mean for your portfolio?
In the context of health, expense management and being a parental role model, can one draw conclusions about what one should invest in? The one takeaway may be that investing is not about bragging rights at cocktail parties. If you can afford it and can afford the risk that comes with an investment to “show off,” I don’t have a problem with anyone investing in a pet project or going along for the ride in a tech startup, be it through private equity or a fashionable stock. Let me just guess that if you are the type to go for the hot stock tip, the fashionable idea, you may also be the type of person who fails the Marshmallow Test; coincidentally, I allege it means your long-term investment returns are more likely to be disappointing. In my view one should treat their portfolio like a serious business.

None of this is rocket science. What makes this worth writing about anyway is that I see so many people not adhere to these simple concepts. I also see many parents struggle to help their children learn about finance and to respect the value of money.

Once those basic concepts are understood, one can start talking about portfolio construction. In our industry, we differentiate between financial planners, asset allocators and portfolio managers. A do-it-yourself investor might be wearing all these hats simultaneously. To make it clear, I have nothing against do-it-yourself investors because they are engaged. I would much rather see a do-it-yourself investor who is engaged than someone who has lots of advisors, but doesn’t listen to them or manage them. Just like any outsourced relationship, hiring an investment professional requires management.

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