Over the weekend, I read an article discussing the Retirement Planning Pyramid. This was originally created by The Journal of Retirement Planning and then updated by Tony Isola of Ritholtz Wealth Management. All credit goes to Tony for bringing this content front and center and Josh Brown for getting it updated.
The concept of the article was to deconstruct the original food pyramid and rebuild it using personal finance best practices. Where should you be spending your time and what you should avoid? Let’s dive into each section of the pyramid.
At the top of the pyramid, we find all the stuff you should not be wasting anytime on. Everything from jumping in/out of investments to sleazy salespeople that will ruin your portfolio. These are the areas of your investing career you have to stay away from.
Quit trying to guess when the next market correction will be and instead work on a consistent and repetitive investment process. Too many people horde cash trying to wait for a dip but it might be years until one actually occurs.
Permanently Losing Capital
A well-diversified portfolio will recover from a fall in value during a recession. However, a fictional business model that investors price off their hopes and dreams on, is not an investment but rather a gamble. Buy good businesses!
This might be the most important thing to focus on. In my day to day job, I get to see a number of financial advisors and salespeople. Some advisors do extensive planning work and are passionate about their work. Others are salespeople who work day/night to fit the best commissionable product in your pocket. Spend time learning about what makes a good financial advisor.
Politics & Investing
This should be a no-brainer but probably more than half of investment decisions seem to be made around politics. Leading up to the last election, the outcome was on every investor’s mind. I would emphasize focusing on the management of a business. A solid CEO and management team can create insane amounts of wealth, regardless of whos in office. I would highly recommend William Thorndike’s “The Outsiders” to learn about some of the best CEO’s of our time.
The next layer of the pyramid is stuff we should try to reduce completely from our personal finances. Think of this like sugar, it’s fine in a diet just in moderation.
Checking Account Balances Frequently
This should be obvious to all but I will make one exception. When it comes to investing, time is key. The longer you can allow compound interest to work, the more wealth you will accumulate. Looking at your investments frequently creates a habit of focusing on the short-term volatile periods. However, checking and savings accounts should be checked regularly. To best ensure your cash flows are positive and you have room to save, I would advocate a weekly or monthly review of all cash accounts.
Watching Financial Media
The financial media sells news, not advice. Try not to get this confused. Whether its CNBC, Fox Business, or some online media network, the goal of each station is to create action. The action is not intended to make change your investments but instead, take advantage of some advertisement. The downside to financial media is all the large investment firms run ads, making you feel you need to take action with some financial product. I would highly recommend checking out the last image on my Information Overload post.
Worrying About Your Finances
Stress kills, literally. So why let your finances become another area of stress in your life? With some simple saving and spending strategies, it is very easy to make your finances stressless. Along with this, should be a stressless investment strategy. If you have to stay up at night thinking about your investments, you’re in the wrong strategy.
Now we get to the good stuff. Here is where we want to be spending our time to improve the outcomes for our investments.
Increasing Your Savings Rate
Many investors think the best way to improve their retirement projections is to focus on taking more risk and aiming at higher returns. In reality, increasing your ability to save will vastly improve any retirement plan than trying to increase your returns. Focus on consistently increasing your savings for best results.
Dollar Cost Average
This goes back to not focusing on your accounts every day. One of the best features of a 401k is the fact that you contribute biweekly. Being able to buy into your investments regularly greatly improves our ability to compound our wealth.
Avoid Taxes & Expenses
Another common sense step is to keep an eye on your cost. As the cost to own mutual funds and ETFs have plummeted, so should your portfolio cost. Be smart to also make use of tax-efficient investment vehicles, like IRA and Roth IRAs.
Don’t put all your eggs in one basket. If you can reduce the number of potholes you step in during your investing career, you reduce the possibility of blowing up your future. Everyone wishes they owned Amazon since IPO but to do so required multiple 50%+ drops. Would you have the mental fortitude to hold through a drop like that?
This is by far the best part of this pyramid; continued self-development. Working hard to improve your future self will pave a path of success ahead.
Invest in Yourself
With the internet, immediate access to amazing content has never been more prevalent. It’s up to us to spend our limited hours consuming the right content. Choosing a good book to further develop your career will pay more dividends than binging the next Marvel series on Netflix.
As I discussed in my last post, diet and exercise correlate very well with your personal finances. The more you can create structure in your health-based habits, the more likely these structures will rollover to other aspects of your life.
Spend as much time as you can building up the base of the pyramid, YOURSELF before you get too caught up in the rest of the minutia.