When it comes to financial questions, there are two reasons people might disagree: In some cases, they disagree about the facts—whether interest rates are headed higher, for instance. But sometimes people disagree for another reason: They see things through different lenses.
For example, last week I mentioned Ray Dalio, a prominent hedge fund manager, who said recently that he thinks bonds “have become stupid.” I disagreed with this view, but not because I disagree about the data. There’s no disputing the impact of today’s low rates. But I think it depends what you’re trying to accomplish. If you’re a hedge fund manager like Dalio, your objectives are going to be different from those of an individual investor. For a hedge fund, maybe bonds are stupid, but for an individual investor, they might make tons of sense. It’s a matter of perspective.
This idea—that some things are a matter of perspective—is important to understand as you navigate your financial life. That’s because many commentators present issues in black-and-white terms, without acknowledging that there might be two reasonable, though opposing, points of view on a given question. Below are five other questions that I see as matters of perspective.
Asset allocation: Investment advisor and author William Bernstein is often quoted as saying, “When you’ve already won the game, stop playing.” In other words, if you’ve already accumulated enough savings to meet your needs—or if you’re on track to—then you should dial back on the risk in your portfolio. There’s no sense continuing to take risk when you don’t need to. Warren Buffett has expressed this same sentiment: “It’s insane to risk what you have and need in order to obtain what you don’t need.”
Suppose you’ve saved $5 million for retirement and only need $100,000 on top of Social Security to meet your expenses. With these numbers, implying a modest 2% withdrawal rate, you’d be in great shape. If you took Bernstein’s approach, you would manage your portfolio conservatively to avoid jeopardizing that strong position. But some might reach precisely the opposite conclusion, reasoning that with $5 million in the bank and modest needs, you could afford to take more risk.
What’s the right answer? My view is that there is no “right” answer. It will depend on your goals and what’s most important. Are stability and security most important, or are you looking to grow your portfolio as much as possible? Where you come out on this is an entirely personal decision.
Interesting investments: David Swensen was the longtime manager of Yale University’s endowment before he passed away recently. Swensen was a pioneer in developing complex investment strategies. But in a book he wrote for individual investors, Swensen advocated the exact opposite approach. His advice: Buy simple, low-cost index funds and steer clear of complexity. Swensen had concluded that individuals simply didn’t have the resources to pursue the same strategies that worked for an endowment. Many investors have accepted this message and don’t pursue complex strategies. But nothing is absolute. I know plenty of individuals who have done well with private equity, with angel investments and with other non-standard investments, including, more recently, cryptocurrency. I still don’t recommend them. But especially if you’re at the stage I referenced above—where you can afford more risk—I don’t think anyone can say those kinds of investments are wrong per se. It’s a matter of perspective.
Retirement income: When it comes to Social Security, the math says that most people will benefit by waiting until age 70, when they can collect the largest possible monthly check. Personally, that’s what I usually recommend. But I appreciate that there’s another point of view. Some people who try to wait until 70 are filled with financial stress during their 60s as they wait for their 70th birthday. In my view, that’s hardly a victory. So this is another case where it’s not just about the math. As long as you’re not jeopardizing your plan by claiming too small a benefit too early, no one should say in absolute terms that it’s wrong to start benefits a little earlier. As with bonds, perhaps you’re giving up some number of dollars, but you’re also gaining something in return: stability and peace of mind. It’s a matter of perspective.
Mortgage payoff: Among the questions I see most frequently is: If I can afford to pay off my mortgage, should I? This question is so tricky, I think, because it seems like a straightforward financial decision. But when it comes to your home, no question is purely financial. There’s always an emotional component. For that reason, I have observed a spectrum in how people think about mortgages. Some point to the numbers and conclude that they’re better off borrowing as much as they can when rates are low. That would allow them to invest more productively elsewhere. But others don’t care what the numbers say. They derive so much satisfaction from being debt-free that they never give a second thought to the potentially more productive investments that they gave up. Again, neither of these points of view is necessarily right or wrong. It’s a matter of perspective and what matters most to you.
Estate planning: Today, the Federal estate tax stands at a hefty 40% for families whose assets exceed a certain threshold. If you’re in that category—or expect to be—there’s a clear incentive to pursuing tax-saving strategies. You might create an irrevocable trust, for example. But other families aren’t as aggressive. They see these strategies as adding unwanted complexity to their lives. It’s true that to implement these kinds of strategies requires upfront time and cost. In addition to legal fees, there’s the mental energy of moving assets around and tracking those changes. There are ongoing costs too. A trust like this, for example, requires an independent trustee—and trustees generally like to be paid. In addition, these trusts require their own tax return. For those reasons, I have seen more than one high net worth family decide that they don’t want to spend their days working on estate planning. Instead, they simply accept that some part of their assets will be paid to the government. Or they structure things so that any amount that can’t pass tax-free to their children will be donated to charity. What’s the right answer for your family? Again, it depends on your priorities. It’s a matter of perspective.