Make This Year Better by Asking the Right Question
With 2012 still fresh and new, it's a great time to make a plan to have a better year financially than we did in 2011. But figuring out how to make smart decisions about money can be a frustrating experience. In large part it comes from the sense that it should be easy. After all, it should be a simple math equation, something that fits in a spreadsheet, right?
I think a significant part of our frustration with money comes from the fact that making smart decisions is not as simple as finding the right spreadsheet. Emotion and how we feel about money plays at least as large a role as the calculator.
Given the role that emotion plays in our financial decisions, I've found it far more interesting, and frankly more helpful, to focus on asking the right questions, instead of obsessing over one-size-fits-all answers. By learning to ask better, or at least different, questions we can have some hope of having a better experience.
Investment Risk and the Growth of Wealth: The Importance of Course Corrections
I have a problem. In fact, I think we all have a problem:
We have been way too focused on returns, resulting in the utter destruction of our wealth.
The investment industry has been built using tools that might be appropriate for understanding investments, but are totally worthless for investors. In real life, real people, using real money do not care about returns. We care about our wealth, and the two are not the same. They are not the same!
Investing 101: Average is NOT Normal
On average, stock market returns are higher than inflation, money markets, or bonds. Understanding this is an important step to any successful financial plan, but there is a huge difference between "average annual" and "every year".
Many of the commonly-used approaches to financial planning take long-term average rates of return and then make the assumption that you will get that return every year. Say you build an investment portfolio that you think will have an average return of 8.5%. Just because the average is 8.5%, it should be obvious to anyone that has been alive the last 12 months that this does not mean we will get 8.5% every year.
While this may seem obvious, the implications are huge.
