Say the word “finance” and many people’s eyes just glaze over. I totally understand that. Money and investing can be quite a dense topic, even for those of us in the business!
It’s appealing, then, to have someone tell you that there are “three simple rules” or “one big decision” that will cut away the confusion and make things easy.
Some of those “easy rules” finance books and articles are okay, of course, but in practice they can be hard to use day to day. A major exception, in my view, is when the advice comes from a stellar financial thinker such as Charley Ellis.
Charley serves on the Investment Committee at Rebalance, along with Princeton professor Burt Malkiel, former IBM Retirement Funds Manager Jay Vivian, and Kristi Craig, who runs the National Geographic endowment.
Charley’s career is who’s who of lauded financial names. He served as chairman of the Yale Endowment and sat on the board at Vanguard. He’s written many of the financial industry’s highly regarded books, including Inside Vanguard, his newest, to be published on October 25.
He recently joined Bob Pisani on CNBC to talk about long-term investing, and he broke things down so simply and beautifully I thought it was important to share.
To paraphrase, Charley argues that you can think of your financial life as a matter of six words and three numbers. That’s it. Here they are.
First, the six words
The first is time. More than returns or lucky choices, time is the biggest and most powerful tool you have when it comes to investment. Start investing as early as you can and for as long as you can.
The second word is save. Put simply, you cannot invest what you haven’t saved. This gets back to time. If you wait until you have more money to invest, you lose that time. Save what you can, and invest it promptly.
Now comes plan. Too few people think about what they want their money to achieve for them. A financial plan spells it out and keeps you on track. So, create a financial plan soon, and share it with your partner.
Now think about total. Rather than focus on just your cash savings or just your retirement money, write down a total picture of your assets, including your house, 401(k), Social Security payments, inheritances, pensions, collectibles, business interests, and so on. It’s important to know what you have so you can better understand what you can risk in exchange for growth.
The fifth word is index. Owning a low-cost index fund is simply the most cost-effective way to invest. And since cost is a drag on returns, it’s also the most effective way to invest, period.
Finally, stop. Don’t make a financial decision unless you really want to. In most cases you should do nothing. For instance, when stocks are volatile, the data strongly indicates that you are better off just waiting things out.
Now the three numbers
The first number is 76%. That’s the difference in what you would get in Social Security payments if you wait 8 years from the minimum age you could begin collecting it, which is 62. You get an 8% raise every year you wait. That’s a huge difference.
Next is the number 10. According to Warren Buffett, there are around 10 important financial decisions you will need to make in your life. These are decisions such as getting married, buying a home, having kids, and so on. Focus on getting those right, and get some help from a qualified financial planner along the way.
Last is 60. This is the number of years you will have the opportunity to be an investor. Most people should start investing in their 20s, not their 40s or 50s. And most people should stay invested at some level well until retirement. Again, we’re back to time as the key driver.
Charley has been at this for a long time and he’s seen every market environment imaginable. More importantly, he’s seen how people can be successful with their financial decisions and, in some cases, how they can fail.
I strongly believe that if you can focus on these six words and three numbers, good things will follow you on your retirement journey.