Seven simple financial suggestions
Admit it: You're sick of the forecasts, counsel and tips raining down at this time of year. You probably know very well that the likelihood that any given prophecy will come true is 50 percent: either it will, or it won't.
So this morning we decided to play it safe and deliver seven simple financial suggestions that we believe are more relevant than ever before, whether stocks in Tel Aviv, London or China rise or fall in the year starting today.
By the way, if you work for the Bank of Israel (and benefit from a non-contributory pension of NIS 2 million, redemption of sick days and vacation worth NIS 1.5-2 million), or the higher echelons of the defense sector (and get early retirement and millions in pensions for which you set aside not a penny), or if you live off some other fat-cat public-sector disgrace, this article is not for you. Go read something else; the state will take care of your financial well-being.
If you are anybody else, tossed willy-nilly into the era of open markets, this article is for you.
1. Do not listen to your parents.
They lived in a simpler time. Most had secure jobs and subsidized pensions. If you don't have a subsidized pension, your financial future depends on you and you alone. Sure, the state will give you a miniscule National Insurance stipend, but nobody's going to teach you how to secure your personal comfort in old age.
2. Investment advisers at banks, insurance agents and investment managers are appropriate sources of information.
Some are good and have the latest information. But never forget that their advice can be biased toward what makes the most money for them.
These days, the Association of Insurance Agents is running a campaign, telling you that only its insurance agent is loyal to you. Of course this is arrant nonsense. After all, most insurance agents are loyal to themselves first and last, and push hideously expensive life insurance programs down the throats of unsuspecting clientele, in exchange for bloated commissions. Now some are trying to shove their unsuspecting clientele into training and provident funds.
Investment advisers at banks have similar problems, but at least they're subject to the supervision of the Israel Securities Authority and Supervisor of Banks.
In short, do your homework before consulting anybody, and start by finding out how much commission they make from each item they push (or don't push).
3. Listen up: A difference of 2 percent in annual returns on your provident fund, mutual fund, training fund, pension fund or investment policy is a lot of money.
The difference between 5 and 7 percent returns over 30 years accrues to compound interest of 330 percent. Yup - that 2 percent adds up to a 330 percent difference.
4. Now you understand why Warren Buffett says the secret is to start early and live long.
What he's been saying is the iron rule of investments: Time makes all the difference and the difference can be huge over time. Start saving as early as possible, even if you can't put aside much, and keep saving even when times are tough.
5. Beware financial wizards.
Bill Miller of the Legg Mason group beat the market 15 years straight, and in the last two years managed to recruit the staggering sum of $65 billion into two funds he runs, buying all the investment management activity from Citigroup, the biggest bank in the world.
And then, when Legg Mason had $900 billion under management, came the bad year. The flagship fund returned 6.7 percent while the benchmark index, the S&P-500, did double that.
If Miller typifies anything, it is that very few stars survive more than five years, let alone 15. But you get the point: Superstars tend to flounder when the downturn hits.
6. If you're saving for the long run, you can afford to take bigger risks and allocate more of your portfolio to stocks.
But remember that your ability to get into and abandon stock markets "in time" is a lot more limited than you think. Stock markets tend to spurt once every few years and can wipe out years of gains in weeks, or even a day. The only way to benefit from the upside of riskier investments is to stay in all the time.
The problem is that most investors succumb to both euphoric and panic attacks.
7. Still dithering about your financial future? In the next column we will explain why the burden of pension savings will only grow in the years to come.