I’ve been learning the Rambam’s Mishneh Torah via an excellent podcast featuring Rabbi Yehoshua B. Gordon, z”l. A famous component of the work is the “Thirteen Principles of Faith” enumerated in the introduction to the tenth chapter of Talmud Sanhedrin. Rambam contends that one who denies any of these principles is a heretic, forfeiting their place in Olam Haba.
Naturally, reviewing the Thirteen Principles of Faith caused me to ponder what I’d label as the core tenets of wealth. Based on my years of working with families, I’ve pinpointed the below thirteen principles to be successful with money:
- Your income is your greatest asset: An often-overlooked area of financial planning takes place prior to making your first penny. High school students need to seriously consider their next phase. If they choose college, it must be viewed as an investment in their future. Overpaying for a useless degree is not an option.
Students must choose their careers wisely. Find something that is practical, plays to your natural abilities, and you find bearable. Contrary to the “advice” of many billionaires, pursuing your passion is generally not practical. You don’t need to love your job; you just can’t hate it. While this doesn’t seem glamorous, a realistic career can facilitate a comfortable life and the ability to weather many of life’s unexpected speed bumps.
- Your home will achieve poor returns relative to stocks, but it is still a good investment for most families: My thoughts on home ownership have evolved over time. One’s house is a low returning investment, after factoring in all associated expenses. In fact, it will likely barely outpace inflation. However, a home is a form of forced savings. Few homeowners will risk losing their house by becoming delinquent on their mortgage. If you live in a home for several decades, and the value appreciates a little bit every year, you will likely be left with a significant asset to sell, which will help fund your retirement. Consequently, many Americans largest asset is their home, and the annualized returns relative to the market are irrelevant.
It’s worth noting that renting is also a wonderful option. However, for most young couples, buying a home that they can afford and will live in for the next few decades is usually the right financial decision.
- You won’t be able to consistently achieve investment returns in the mid-teens: Sorry to break the bad news, but few people (i.e. not you!) are lucky enough to find investments that will CONSISTENTLY be able to achieve outsized returns. Everyone has friends, relatives, or colleagues who make that unsubstantiated claim. Even famous financial gurus will make the same baseless assertion. In fact, it seems like many of the investment strategies that are pitched to my firm target a return in the “mid-teens.” However, targeting a high rate of return and actually achieving it are two different things.
In the investing world, 15% annualized returns are abnormally high. It is extremely unlikely to be achieved consistently and requires taking a high level of risk. Any money manager who claims that they can deliver these results should be viewed skeptically. Thankfully, achieving “mid-teen” annualized returns is not necessary for financial success.
- Process is more important than products: Discovering a home-run investment is a low-probability event. Adopting a disciplined process for building wealth is far more likely to lead to riches than stumbling on the next Amazon or Nvidia. Key components of an effective process include spending less than you make, automating your savings every month, investing those savings in a diversified portfolio of stocks and bonds, and sticking with this strategy over the long-term.
- Avoid Mistakes: Successful investing is a game of defense just as much as offense. This means avoiding common pitfalls to which so many families succumb. Most financial mistakes fall into two general categories: Debt and “noise.”
Debt is bad. People will argue that borrowing money also has positives. However, the people who are in the best shape financially are generally folks who are not indebted to anybody. Strive to eliminate all your debt, especially from credit cards.
Don’t get distracted by “noise.” This broadly refers to things that are irrelevant to your life but may cause you to patschke with your portfolio. Talking heads on TV are quintessential noise; they discuss how the short-term market movements and latest geopolitical news should impact your strategy (they shouldn’t!). Noise may also include the distraction of folks in your social circle who may influence you to spend more money on things you don’t need or alter your portfolio. Tuning out the noise by using automation or a financial advisor (or both) will allow you to avoid many common financial errors.
- Emotions and investing don’t mix: Your emotions are the biggest risk to your portfolio. Folks tend to make drastic decisions when they are feeling scared, greedy, or impatient. These impulsive moves won’t work out. This is particularly relevant in an election year when even the utterance of a particular nominee’s name is enough to enrage people who are politically charged and cause them to make rash investment decisions. Mixing politics and your portfolio is a recipe for disaster. When it comes to emotions, the best approach is to keep them in check.
- Lifestyle decisions are more important than investment returns: Many of the best financial decisions are actually lifestyle decisions. For example, who you decide to marry and where you decide to live are far more impactful to your nest egg than having outsized returns. A spendthrift spouse or living in a high-cost-of-living locale can lead you to struggle financially. Conversely, an employed spouse who is careful with money or residing in a more economical part of the country can lead to growing your wealth more effectively.
Furthermore, actively deciding to maintain a high savings rate throughout your working years is more important than trying to achieve high returns. Future returns are impossible to predict. Investors can exert control over how they choose to allocate their cash flow. Deciding to maintain a high savings rate is one of the best tools investors have to secure their financial future.
- Simplicity trumps complexity: Investors tend to make their financial lives unnecessarily complicated. This includes having funds scattered at various banks, searching for the “best” products and strategies, and having a myriad of additional investments outside a brokerage account.
A better approach is to keep your investments streamlined and boring. Have all your money consolidated in one or two financial institutions, invest in plain vanilla investments, and don’t chase the latest hot investment “opportunity.”
Keeping your finances simple will allow you to be organized and avoid major mistakes. As Leonardo da Vinci said, “Simplicity is the ultimate sophistication.”
- An investor’s time horizon is the cornerstone of investing: Time horizon dictates how much risk should be taken within your portfolio. It is also the main determinant of developing an appropriate asset allocation. Investing without having a clear understanding of when you need to use the money is imprudent.
This is especially relevant today when interest rates are at a two-decade high. Many investors flock to CDs and money market accounts earning approximately 5%. Unfortunately, for any investor with a long-time horizon, this is foolish. This approach will cause you to lose buying power overtime due to inflation. Stocks are one of the few vehicles that can outpace inflation and should be included in any long-term strategy. If you allow your time horizon to dictate your allocation, rather than your feelings, you will be far better off.
- Don’t let the tax tail wag the investment dog: There are many ways to minimize one’s tax bill. This includes contributing to retirement accounts, using tax-efficient investments, and using losses to offset gains. Despite many creative strategies to lower one’s taxes, you will never be able to avoid them completely. There is no way around the fact that if you make money, you will also need to pay Uncle Sam his share. Don’t lose sleep over this and don’t let it be the main driver of your investment decisions. It will lead to missed opportunities.
- Don’t let perfection get in the way of progress: Successful investing does not mean perfection. There is no perfect portfolio or time to invest in the market. Two investors with the same risk profile, goals, and time horizon may have different portfolios suggested to them by various investment firms. All those portfolios may be reasonable. As long as you embrace timeless investing principles, like the items I outlined above, you should be fine.
Furthermore, waiting for a stock to trade at some arbitrary price often leaves the investor waiting indefinitely. If you have a prudent strategy, move forward immediately. The optimal time to invest is always today.
- Bad things happen. Plan for this inevitability: No one is immune to hard times. Unexpected death, disability, automobile accident, theft, fire, legal action, and long-term care needs all happen. Failure to plan for these unpleasant life events can erode your family’s wealth. Get the proper risk management in place. This can be in the form of insurance, prenuptial agreement, estate planning documents, or rainy-day fund, to name a few.
- Money is a tool, not a scorecard: If your self-worth is tied to your possessions, it will only lead to struggles, heartache, and an unfulfilling life. A healthy relationship with money will likely lead to a better family life, broader societal impact, and a potentially larger nest egg. An important framework to make the most of our material success is to remember that a) all that we have comes from Hashem, b) money should never define who you are, and c) Tzedakah is the ultimate remedy to most money problems.
I imagine these tenets of wealth will be disputed and considered controversial to some. However, through years of experience, many investors will eventually realize that these lessons are timeless. They are relevant to folks of all levels of wealth and will still apply decades in the future. The sooner folks embrace them, the better position they will be in financially.
