For those of you that don’t know me personally, and maybe those that do, I have a confession to make: I’m a worry-wart. It’s just how I’m wired and I won’t deny it. Now I don’t necessarily think it’s always a bad thing to worry. We all have to think about our kids, spouse, parents, careers, health, etc. But the way I see it, if worrying prompts proactive and productive action, then it’s actually helpful. I’m learning that is the key: discerning and discriminating between the types of scenarios we are worrying about. In short, I’m learning how valuable it is to be conscious of things we CAN control and things we CAN’T control. Said differently, knowing the difference between our “endogenous” factors and our “exogenous” factors.
For planning our financial lives, it’s really no different and I would argue it a critically important principle to apply to achieve some peace-of-mind. This is especially true in today’s world of non-stop blaring of financial (mis)information being pushed on us by radio shows (usually just de-facto commercials), cable news, the internet and choose-your-social-media. Realizing this, I believe it’s really helpful to examine some of those big worries that I most often hear from clients and break them down between things we should worry about (and act on) and things we should NOT worry about (and ignore).
Exogenous Factors: What NOT to worry about
So here’s a list of things we have absolutely no control over and are a waste of time to spend more than a few minutes considering:
- What’s the stock market going to do tomorrow / next week / next year?
- What’s the economy going to do?
- What happens if / when the Fed raises interest rates?
- What happens if a global pandemic spreads to the U.S.?
- What happens if Russia invades Ukraine?
- What happens if a Democrat gets elected to the White House? What happens if it’s a Republican?
- What if my company eliminates my job?
- What happens if I get flattened by a beer truck tomorrow?
Instead of commenting on each question above, it’s more expedient to just address them all with one blanket, two part answer:
- Nobody really knows the answer to any of these
- We can’t do anything about them anyway!
Endogenous Factors: What to worry about (and even better, do something about)
Contrast that list with this one: things we can actually do something about (and my brief thoughts on each):
- Are your liabilities and future earnings properly insured? I don’t care how much you earn, how smart an investor you are or how healthy you are. If you’re not properly insured (factoring in current assets and future liabilities) with solid life insurance, you are simply putting your family at risk. This is especially true if you have young children. Term insurance is generally inexpensive and easy to qualify for (assuming standard health) – there’s no excuse not to have it. You can’t control the “beer truck” hitting you but you CAN control covering the financial ramifications of this unfortunate scenario. And this is coming from a guy who gets paid absolutely $0.00 to make this claim.
- Are you spending more than you earn? I’ve written extensively on this (see knwm-llc.com/what-you-keep/) but the short story is this: it doesn’t matter how much you earn if you spend more than your income. You could be the best investor the world has ever known but it won’t matter if you have $0 to invest.
- Are you paying as little income tax as allowable by law? It’s been my experience that income taxes are the single biggest expense most people pay each year- could be 30% or even 40% (or more) of your income. Why not pay attention to this expenditure first? There’s the most bang for your buck here.
- Are you spending too much on your investments? I’ve also written multiple articles about this (one example: knwm-llc.com/more-than-luck/) but it bears repeating. We have a choice as to invest in expensive mutual funds or not. Given most “expensive” funds usually don’t consistently beat their less-expensive peers over the long term – why not pay attention to this? Even if you’re limited to investing in 401(k), you can still usually limit the damage. What’s a good estimate? Take 1.5% (or 2.5% or more if you’re working with a “fee-based” advisor) and multiply that by your investible assets. That’s how much you’re likely spending on your investments, advice or no advice, if you use actively managed funds.
- Are you adequately diversified with your investments? Much like the choice we face between actively managed (i.e. “beat the market”) funds and index funds, we can also usually choose how well we diversify not only among asset classes but also geography, market capitalization, etc. In addition, assets can be assigned a “job” to help weather the storm in various economic scenarios (e.g. inflation, deflation, “the good times”). Too often this goes on autopilot and gets out-of-whack but it’s definitely something we can control if we just pay attention a few times a year.
- Are you doing the best job you possibly can with you career? We usually can’t control what new “right sizing” or “rationalization” our employer might be about to do. But we can control our effort, attitude and value to the company. Worrying about anything else is a waste of time.
- How can you balance retirement savings vs. college savings? This is a goal for most folks with young children (myself included) but there’s usually limited resources here that must be allocated carefully. We can’t survive on cat food in our retirement years so Junior can go to Princeton, so we have to strike the proper balance.
- Do you know how you assets will be allocated upon your demise? Like insurance, even a simple will would go a long way in helping your heirs deal with distributing your assets. They’ll be upset enough upon you death (hopefully), do them a favor and have your documents in order so they don’t have to “clean up” after you and wonder about your intentions.
- Is my financial advisor really looking out for my best interest? Sadly, you should worry about this as many (not all) advisors are incented, and therefore act, in their own best interest, not yours. If you’re shopping for an advisor or already have one, ask him or her to sign a fiduciary agreement stating they will always act in your best interest. You may be surprised by the reaction.
Bottom Line: I’m as guilty as anyone of being a worry-wart, it’s just my nature. However, I believe our time and efforts are best served by diligently addressing those things we can control and in fact, it’s something I try to keep in mind more and more every day. While there are many aspects of our lives that are out of our hands, the good news is there’s a lot in our financial lives we CAN control. So we should all think about letting go of those “exogenous” factors, get to work on those “endogenous” factors and finally achieve some peace-of-mind in our financial lives.