Posts filed under “Apprenticed Investor”
‘Never buy a boat’ and other rash financial advice
Washington Post, September 27, 2015
“A boat is a hole in the water you throw money into.”
“The two happiest days in a sailor’s life are the day he buys a boat and the day he sells it.”
I have a somewhat unique perspective on dispensing financial advice. I run an asset management firm. We hear all manner of terrible advice that our prospective clients have received elsewhere. (No, owning physical gold and the SPDR Gold ETF does not mean you are diversified.) Conflicted advice, thoughtless portfolio constructions, high-risk low-return bets and debunked financial myths are just the tip of the iceberg.
I also write about investing. Hence, a natural tension exists: Good investing is boring and long-term, while good writing tends to be emotionally appealing and punchy. It’s a trade-off, and I understand how nuance and subtlety can be lost in the media’s hunt for clicks.
This came to mind recently when I read an intriguing column headlined “Never buy a boat.” As a boat owner and lover of the seas, I found it an amusing discussion. But as a financial adviser, I was sorely disappointed.
I am sure you have seen many other such “lessons:” Houses are money pits. Don’t drink expensive lattes. Never install a pool. Don’t go to college. Golf is an expensive hobby. Don’t invest in a 401(k). Never buy a high-end sports car.
Merely saying “no” is not financial advice; it is a form of blind risk avoidance. The problem with such advice is twofold. First, it misunderstands the purpose of money. Second, it fundamentally misses out on the best way to make intelligent financial decisions.
Money, for all its glory and the trouble the blind pursuit of it has caused, is misunderstood by many. No, money is not the root of all evil. The problem is people and how they behave around it.
Money is merely a tool, a medium of exchange. Its value is that it allows its owners the freedom to make decisions that those without it cannot.
At its most basic level, money allows sustenance and security: Food, housing, clothes, medical care and transportation. Get a little more of it and you can pay for your kids’ education, and take a vacation now and again. Freedom from worry is a nice benefit of having enough to cover the above. If you’re fortunate to have more than enough, then other choices emerge: philanthropy, entertainment, hobbies, travel, whatever indulgences catch your fancy.
Which brings us back to our boat: Assuming you have enough cash and/or credit, using some of it to buy a boat is simply an option, one that should be considered intelligently.
Let’s start with the costs. There is the purchase price, which experience teaches us is the smallest expense of boating. Where will you keep it — at a marina slip (most expensive but most convenient) or a mooring (cheaper but less convenient) or trailer (cheapest but least convenient). You might own a dock, but that means you spent a lot of money on related real estate. Maintenance and repairs are not cheap, especially if you are out in saltwater (as opposed to freshwater lakes and rivers). There are issues of winter storage if you live in the north, and then prep for boating season. Fuel and insurance are costs, as, of course, are food and beer.
These are all easily calculable by anyone with a spreadsheet (or even a pencil and paper). You should be able to determine pretty accurately what a boat will cost you; assuming you have a household budget (what do you mean you don’t?!), then you should also know how much boat you can afford.
There are many other questions: How much are you going to use it? What friends and family will accompany you? Who else do you know that boats? What other time demands do you have? Think about these and other questions, and you can determine (a) if you can afford a boat and (b) if it’s worth it to you.
We can run through the same exercise for just about any expenditure, from that latte to a vacation home. Just saying no is lazy, and misses the point of money as a tool.
Let me suggest better advice than “never ever buy a boat.” Try the following: “Don’t buy things you cannot afford, won’t actually use and that could cause you more pain than pleasure.”
I have many friends who are boaters. One bought a 14-foot kayak and goes out every morning (weather permitting) for a robust paddle. His blood pressure is down, his outlook is sunny, and he enjoys the solitude on the water. Another friend bought a 55-foot behemoth. It’s a floating hotel, comfortable and luxurious. He hardly ever used it — and sold it at a big loss after a year.
So my advice for people considering buying a boat are to recognize four key issues: knowledge, costs, skill and psychology. For our wannabe boater, or anyone making a major purchase, it looks something like this:
• Understand what you are getting into.
• Carefully consider all of the costs of ownership.
• Only buy what you can afford.
• Make an intelligent decision about using your limited time and money.
This is a useful approach, more thoughtful than merely saying “No!” to anything with a price tag attached.
Not surprisingly, you can apply the same approach to any financial situation. Consider assessing an investment:
• Don’t buy anything you don’t understand.
• Watch the fees on all of your funds, investments, advisers, etc.
• Be smart about your own skill set in beating the market with stock selection or market timing; you are likely better off with an index fund instead.
• Understand how markets behave, and only risk what you can tolerate going up and down with market volatility.
Knowledge, costs, skill and psychology: running any issue through these four filters is not magic, but it does force you to consider important issues you might have otherwise overlooked.
If you want a boat – or something else equally costly – don’t make a snap yes or no judgment. Instead, frame the question in terms of these components. It will lead you to intelligent decision making.
How to ruin your financial life, #badadvice Barry Ritholtz Washington Post, September 13 2015 About two years ago, Ezra Klein wrote in The Washington Post about University of Chicago social scientist Harold Pollack, who “managed to write down pretty much everything you need to know on a 4×6 index card” about investing. I thought…Read More
This week we had a few milestones: On Tuesday, we celebrated the two year anniversary of RWM, which launched on September 16, 2013. Second, we announced a new program that will help lower fees for our clients. Costs are something we are very conscious about. We are always looking for ways to keep fees as low as we can,…Read More
My Sunday Washington Post Business Section column is out. This morning, we look at the idea of putting all if the financial advice anyone needs on an 4×6 index card — the twist is to invert it, via some really bad advice. Both the print and online versions had the Twitter friendly headline How to ruin…Read More
A rollicking week in the markets is really a chance to clean up your act Barry Ritholtz Washington Post, August 28 2015 Don’t say you weren’t warned. A few months ago, with markets on a hot streak, you were given the Solomonic heads-up that “this, too, shall pass.” Your portfolio was basking in the…Read More
My Sunday Washington Post Business Section column is out. This morning, we follow up a June column that advised taking advantage of markets at all time highs to clean up your portfolios. This time out, we look at the market turmoil as a reminder, and the snapback rally as an opportunity. The print version…Read More
Arthur Zeikel, president of Merrill Lynch Asset Management, sent his daughter a letter teaching her some investing basics. Enjoy! Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined financial goal by balancing one’s risk-tolerance level with the desire to enhance capital wealth. Good investment management practices…Read More
As Theodore Sturgeon famously observed, 90 percent of science fiction is crap, but then again 90 percent of everything is crap. In the world of online investment opinions, Sturgeon was an optimist. Not all that long ago, the perspectives of individual amateur investors and professional ones, too, were for the most part unknown. Most market…Read More
How’s your macro? Not too good? Terrible? Unsure what that even means? Let’s start here: Macro refers to the large geopolitical moments, and the natural and man-made disasters, that some investors track as potential market moving events. Large economic trends or reversals, diplomatic breakthroughs, political crises and even war are all macro events. Think: a…Read More
My Sunday Washington Post Business Section column is out. This morning, we look at travels and travails of the macro tourist. That was the name of the online version; in print edition of the paper, it was Is your money subject to the travails of a macro tourist?. Here’s an excerpt from the…Read More