I hope you are enjoying the holidays and looking forward to the new year. But before we turn the page on 2018, I thought I would recap some of the topics that were of most interest to readers this year:
Warren Buffett once compared the stock market to an unstable, irrational neighbor. I think that’s exactly the right way to think about it. When you have a neighbor like this, there’s really nothing you can do about it. But if you can at least gain an understanding of his motivations—why he acts the way he does—that may help you coexist more peacefully. The stock market is the same way. You can’t control it or predict it, but still I think it’s worth trying to understand it. I addressed this topic in Today’s Market Movements, Another Rorshach Test, Beat ’em or join ’em, Staying off the Roller Coaster, On Average, and Is Apple the Greatest Company Ever?
Years ago, I visited Naples, Italy, a city notorious for its crime rate. What I remember most is the way our host locked up his apartment for the night. First came the deadbolts—three of them. Then he wedged an inch-thick iron bar between his front door and the opposite wall. When I think about managing financial risk, I think about it the same way: Wherever possible, within reason, take a multi-layered approach. I explained this concept and provided examples in Six Ways to Diversify. In Ebenezer Hazard, I noted that insurance companies are famous for their longevity and suggested a way to borrow from their playbook. In Careful, I looked at the question of diversifying internationally, and in Rosy Statistics, I looked at an investment I don’t recommend at all. Finally, I looked at the growing issue of financial fraud in King of Polka and Advice I Hope You Never Need.
The investment industry behaves in strange ways. The popular press heaps attention on star fund managers, yet decades of data indicate that the road to investment success doesn’t require magic pixie dust. According to the research firm Morningstar, investment expenses are one of the best indicators of future performance. In their words, “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision.” I addressed aspects of this topic in An Uncomfortable Question, The Lopez Twins, Relatively Normal and How Smart.
The cost of education
The investment industry isn’t the only one that acts in strange ways. In my experience as a financial planner, college tuition is the single biggest obstacle to many families’ financial security. Yes, a college degree still offers a positive return on investment. College graduates experience lower unemployment and higher earnings. Still, the cost for a private college education has, over the years, gone from burdensome to oppressive to ridiculous. Last year, in Lobster, I provided some recommendations for managing the cost. Among them: MONEY Magazine’s rankings, which emphasize the value of an education rather than other intangible factors. You can find updated rankings on MONEY’s website.
The big news at the start of 2018 was an overhaul to the Federal tax code. For some taxpayers, this was like a gift from Santa, while for others it was like a visit from the Grinch. I offered a variety of tax-management ideas in Using the New Tax Law to Your Advantage, Single Digit Tax Rate, Numbers Worth Your Attention and The Roth Conversion Question.
The great British economist John Maynard Keynes once commented, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” Keynes died more than seventy years ago, but the forecasting business is still going strong. I addressed this topic in Expert Opinion and The Opposite of Nostradamus.
The world of personal finance is always evolving. Still, there is a set of timeless principles that, in my opinion, are the bedrock for everything else. In Great Eight I highlighted a group of my favorite authors and thinkers and provided links to their popular books, papers and videos.