The One-Page Financial Plan: book review of a book worth reading

In his new book, The One-Page Financial Plan, Carl Richards does what he does best, to write and visually convey financial guidance in a down-to-earth, conversational and thought-provoking manner.

Carl writes the weekly “Sketch Guy” column for The New York Times and has previously authored The Behavior Gap. Carl is the Director of Investor Education for The Bam Alliance, which our firm is one of 150 national member firms.

When I first started the book, I questioned the title. How can a financial plan be done on just one page? In the first few chapters, it becomes obvious what Carl means by his title. Of course a comprehensive financial plan that covers everything from retirement savings, estate planning, investment recommendations, charitable giving and life insurance can’t possibly be covered in one page. And that is exactly Carl’s point. To most people, dealing with all those topics is totally overwhelming.

Carl provides a different approach. Understand yourself. Understand your goals and why money is important to you and your family. Then get out Carl’s favorite tool, a Sharpie pen, and write down a few important items on a specific topic on an index card. That is today’sOne-Page Financial Plan.” Deal with those things, then move on to other topics.

This book will not tell you how to invest your millions, but it will help you to have important conversations with your loved ones and your financial advisor, about how to deal with these very important topics. Carl recognizes the benefits of using an independent financial advisor. Carl writes that an advisor is crucial to guide you towards financial success, however you and your family define that. He then points out that a good financial advisor will help you to stick to your financial goals and plans…regardless of the uncertainties of life, and the ups and downs of the stock market.

Carl’s writing is direct and easy to read. The book includes many of his excellent financial illustrations, which he is uniquely known for. I highly recommend this book for those who want to learn more than the next hot stock. If you want to be more comfortable with your financial life and attaining financial success, this is a book worth reading.


US v International Stocks?

An article by Bloomberg this week has a provoking headline: “Everyone Hates US Stocks.”  The article said many money managers were underweighting US stocks, based on a Bank of America survey released on Tuesday. The article also cited money being withdrawn from US ETFs and into International stocks. A client forwarded the article to me, wanting our thoughts.

We clearly do not hate US stocks. And we do not dislike International stocks. We think it is important to hold both US and International stocks and have recommended this strategy since the inception of our firm.

We recommend holding a significant percentage of International stocks, approximately 30-40% of your total stock allocation. The money managers and investors cited in this article are trying to take a tactical, guessing game approach to investing. They are trying to move money between countries, trying to pick which one will do better.

We feel a more rational and logical approach is to remain committed to investing in all global markets, as we cannot know in advance which country or geographic area will do best in a given year or period of time. Rather than trying to guess the winning regions, and risk being unsuccessful, we would rather invest our clients’ money in a globally diversified manner over a long period of time.

This approach recognizes that sometimes the US stock market will outperform other world stock markets, while knowing that there will be periods of time that International stock markets will outperform US stock markets. We don’t know when either will occur or for how long a trend will persist.

Historical stock market data shows that owning a globally diversified portfolio, which includes both US and International stocks, will perform better as an overall portfolio. This global diversification can provide a smoother investor experience and temper some of the volatility of owning just one region, such as just owning US large company stocks.

By remaining invested in many geographic regions of the world, our clients will benefit from the long-term economic gains both in the US and overseas. Some years this broad diversification may be to our advantage, some years it may be to our disadvantage. We are confident that over the long-term this will be the best strategy and method to structure a successful portfolio for our clients.


Dow 20,000 or a correction?

As I was driving to work a few days ago, this was the question asked by the host to Dr. Jeremy Siegel, a professor of Finance at Wharton.

Let me rephrase the question: Which will occur, Dow 20,000 or a correction?

The answer: Yes, both will occur.

I don’t know when each will occur or in what order and it really should not matter to a long-term investor.

A market correction is defined as a decrease of at least 10%. These happen often and should be viewed as a common occurrence.

The Dow Jones Industrial Average (DJIA), a collection of 30 large US stocks, is now in the range of 17-18,000. It is not a matter of if the DJIA will reach 20,000, but when that will occur.

The key as an investor is that you must have some of your funds invested in the market, to benefit from the inevitable increases that will occur over time. As economies expand and companies adapt and grow, this will lead not only to Dow 20,000, but the Dow will eventually reach 25,000 and 30,000.

The DJIA reaching 25,000 or 30,000 may seem improbable to you, but in 1980 it was at 825 and in 1999 the Dow crossed 10,000.

Be patient and well diversified and you will reap the benefits.

Buffett’s Important Words of Wisdom

Each year, Warren Buffett, the legendary investor and Chairman of Berkshire Hathaway, writes an Annual Letter that contains incredibly valuable financial advice and business wisdom.

As a reader of this letter every year for at least the past 20 years, I found this year’s Annual Report particularly insightful, as it celebrated the 50th Anniversary of Buffett and Charlie Munger taking control of Berkshire Hathaway management.

In addition to Buffett’s regular Annual Letter, both Buffett and Munger share their thoughts on the past 50 years and provide some insights on the next 50 years.

I highly recommend reading the Annual Letter to learn more about investing, business, management and how important emotions, behavior, patience and a positive overall attitude are to your financial success. The link to the Annual Report and Letter follow at the bottom.

Below are what I thought were the most valuable lessons from this year’s Letter, with an emphasis on Buffett’s thoughts about investing, the future of the US and the patience that is required to be a successful long term investor.

The headlines in bold are added (they are not Buffett’s). The text below is from Buffet’s 2014 Letter, with the exception of the first sentence under the Geico heading:

Long-term optimism about the future:

“Charlie and I have always considered a “bet” on ever-rising U.S. prosperity to be very close to a sure thing….In my lifetime alone, real per-capita U.S. output has sextupled. My parents could not have dreamed in 1930 of the world their son would see. Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never seen one who wishes to emigrate…”

Positive about the economy, but there will always be volatility:

The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead.

The Geico “gecko”

Berkshire owns many insurance companies, including Geico. Buffett commented on the value of the “gecko” as their brand spokesperson: “The gecko, I should add, has one particularly endearing quality – he works without pay. Unlike a human spokesperson, he never gets a swelled head from his fame nor does he have an agent to constantly remind us how valuable he is. I love the little guy.”

Stocks, Diversified Investing and Purchasing Power

Our investment results have been helped by a terrific tailwind. During the 1964-2014 period, the S&P 500 rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196% … Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes $1 to buy what could be bought for 13¢ in 1965 (as measured by the Consumer Price Index).

There is an important message for investors in that disparate performance between stocks and dollars. Think back to our 2011 annual report, in which we defined investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.”

The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.

Stocks are more Volatile than Cash and Bonds, but Volatility is different than Risk

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.

 It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say, investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits. For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.

Lessons of the past 6 years and the virtues of owning a diversified portfolio

 If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement. (The S&P 500 was then below 700; now it is about 2,100.) If not for their fear of meaningless price volatility, these investors could have assured themselves of a good income for life by simply buying a very low-cost index fund whose dividends would trend upward over the years and whose principal would grow as well (with many ups and downs, to be sure).

Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet…”

Note: The above excerpts are from the 2014 Berkshire Hathaway Annual Report Letter, written by Warren Buffett. The full annual report and letter are available at their website, You will see his letters dating back to 1977. Click on 2014 for the current letter.