Seven Simple Financial Suggestions

What you need to know if the state isn't your employer

Admit it: you're deadly sick of the forecasts, counsel and tips raining down at this time of year. You probably know perfectly well that the chance of any given prophecy coming true is 50%: 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 (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 (millions in pensions for which you set aside not a penny; early retirement), 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 health for years to come.

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 world. Most had a secure job 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 that doesn't even make the grade of "not going far". And nobody's going to teach you how to secure your comfort in old age.

2. Investment advisers at the 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 towards what makes the most money for them.

These days the Association of Insurance Agents  is running a campaign, telling you that only our insurance agent is loyal to you. That is of course arrant nonsense. Most insurance agents are loyal to themselves first and last, and pushed hideously expensive life insurance programs down the throats of their unsuspecting clientele, in exchange for bloated commissions. Now some are trying to shove their unsuspecting clientele into training funds and provident funds.

Investment advisers at the 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 with the question of how much commission they make from each item they push (or don't push).

3. Get it: A difference of 2% 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% returns and 7% returns over 30 years accrues to compound interest of 330%. Yup: that 2% accrues to a 330% difference.

4. Now you understand why Warren Buffett says the secret is to start early and live long.

What he was saying is the iron rule of investments: time makes all the difference. Start saving as early as possible, even if you can't put aside much. Over time the difference can be huge. 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 Less Mason had $900 billion (!) under management, came the bad year. The flagship fund returned 6.7% while the benchmark index, the S&P-500, did double that.

If anything Miller typifies the best; very few are the stars who survive more than five years, let alone 15. But you get the point and the superstars tend to flounder helplessly when the downturn comes.

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 euphoric and panic attacks.

7. You read all that and are 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.