My manifesto

This article sets out some of my core beliefs when it comes to money and wealth, with links to various articles where I discuss these beliefs in a lot more depth.

“Wealth” isn’t just about money. “Success” is personal.

Don’t over-complicate your financial life. Try to make your financial life boring so the rest of your life can be interesting.

Everyone has a financial plan, whether they’re aware of it or not. 

It’s important to plan. The value isn’t the plan itself, but the process of planning.

Life has many seasons, and this applies in relation to your finances as well. There are ages and stages when you will save more or less than other stages. For example, when you have young children you are often facing “head winds”. When you are an empty nester with a mortgage-free home you’re facing “tail winds”. It’s important to remember that the tail winds are predicated on the hard work you put in when you were facing head winds and felt like you were in the doldrums.

There are lots of ways to invest. For example, you can invest in financial assets such as cash, savings accounts, term deposits, bonds, shares, listed property trusts, and managed funds which invest in these things. You can invest in direct property.

But you can also invest in yourself – for example, through education, or by taking professional risks which might see your income reduce for a period of time but might provide you with opportunities over the long-run. 

You can invest in ventures that you are involved with. This is one of the best ways of getting better-than-market returns. But you need to be careful about this: it’s also one of the more reliable ways of turning a large fortune into a small fortune.

You shouldn’t just invest to get a financial return. If you really want to maximise your happiness and satisfaction, and manage the risks that really keep people awake at night, you should invest in your health and your relationships.

In other words, you should invest in the things that are truly valuable to you. Again, this comes down to defining what “wealth” really means to you.

Choosing the right partner is one of the most important decisions you’ll never make – financially and otherwise. 

Stop comparing yourself with other people. Everyone starts from a different place. Everyone wants different things (even if there are a lot of commonalities).

Compound interest is magical, but you can be myopic about compound interest. Among other things, focusing on the “magic of compound interest” can result in under-investing in yourself, and discourage entrepreneurship. 

Property has put a lot of Kiwis in a terrific financial position. However, it has also put a lot of Kiwis in a bad financial position. Lots of Kiwis are in a vulnerable financial position due to property.

The idea that property, as an investment class, can generate returns that exceed the general rate of economic growth, is mathematically impossible.

There are many risks associated with property investment that are often over-looked. As a general rule, investing in direct property means you are investing in undiversified, illiquid, geared assets. All else being equal, those aren’t great characteristics.

If you’re going to invest in property, you shouldn’t do so as a set-and-forget investment. You should do it as a business, and you should be able to add value with your time and efforts.

Diversifying is one of the best ways of managing investment risk. (It’s valuable in other domains as well.)

Having wealth you can turn into cash is extremely valuable – for dealing with emergencies and taking advantage of opportunities.

Borrowing to invest (aka gearing aka leverage) can magnify investment returns but can also magnify losses. If you “need” to borrow to invest, chances are that you can’t afford to borrow to invest.

Most people will go far by investing in widely-diversified, index-based, low-fee managed funds. These funds can be thought of as vehicles for investing in hundreds or thousands of underlying investments in a convenient, safe, and cost-effective way.

For most people, the maximum you should put away in KiwiSaver is whatever is necessary to maximise employer co-contributions (usually 3% of salary) and Government Contributions (a minimum investment of $1,043 per year). For most people, investing more than this is locking funds away with no counterbalancing benefit. Having said this, locking funds away for some people is a “feature” rather than a “flaw”.

In most cases, paying off debt is a sound financial decision. This is especially the case for high-interest, personal debt, such as credit cards.

In terms of whether to pay off your mortgage or invest, for many people repaying your mortgage is a good decision. Having said this, there can be benefits to investing some funds so you (a) have easy access to funds if you need them for emergencies and opportunities and (b) to provide you with valuable experience of investing while the stakes are relatively low. 

Talking about investment volatility and market downturns is like explaining sex to a virgin. You can describe the experience but you’ll never fully capture it. This is why it’s good to start investing early. This will give you insight as to your true tolerance for risk, and help weather you for volatility in the future.

You shouldn’t borrow money to buy a car. Buy the cheapest car your ego can afford (but if it’s Porsche Cayman, go nuts!).

When it comes to investing, the most important decision is asset allocation. 

Your asset allocation should be influenced by your personal tolerance for risk. Another enormous factor is your cash flow needs. 

All investments involve risk. Any investment decision involves balancing risks.

Sometimes investing too defensively is risky. If you have funds earmarked for several decades’ down the track, investing these funds too conservatively is likely to mean you’ll end up in a much worse position over the long-run.

In most cases, people don’t have investment problems. Investments have people problems.

You should make investment decisions based on your circumstances, needs, and objectives, and not the whims of the market.

For most people, the best thing you can do with your investments is “set and forget”. Review every 12 or 18 months and make changes in light of your circumstances, needs, and objectives, and focus on other areas of your life.

The Barefoot Investor is great in a lot of respects. But regardless of what Scott Pape preaches, there’s no “one size fits all” approach to personal finances. Many of his lessons aren’t applicable to Kiwis.

Beware blogs that sell affiliate products and services. 

Personal finance blogs will come and go. They are hard to monetise, especially if you’re not a financial professional. The exceptions to the rule (like Mr Money Mustache and the White Coat Investors) are… exceptions to the rule.

There are lots of great blogs and resources related to money. They are created by people with different backgrounds, assumptions, and personalities. Find and follow the voices that resonate with you. With all information, read with a critical eye. (In the words of David Wong, “there are no Supermonkeys. Just monkeys.”)

Incentives matter. In the world of finance, this creates all sorts of distortions that impact advice. “Show me the incentives and I’ll show you the consequences.” Disclosing conflicts of interest is inadequate for managing this risk.

There are lots of self-interested, or well-meaning but misinformed, people who instill fear and moral panics in relation to money. Ignore them. Or at least think critically about what they have to say.

(On this note, most people who have a strong opinion about property have financial incentives to push property as a terrific investment. There are very few incentives to be bearish about property.)

Beware of empty suits and money vampires.

People bandy around terms like “fiduciary” without properly understanding the term, or whether a fiduciary relationship is necessary or appropriate in the first place.

When it comes to building wealth, savings rate is important. But as with being too narrowly focused on investing, you can get too carried away and be myopic with frugality. Savings rate over the course of a lifetime is important.

FIRE (“financial independence, retire early”) is great for some people. It’s terrible for others. Pick your poison. 

From a financial perspective, baches are terrible – but for some people, they’re well worth it.

You don’t need to get to a position where you can “live off the interest” or “live off the income” of your investments. For most people, decumulating your capital in a managed way will result in a better lifestyle, and reduce the amount you need to save in order to retire.

The 4% rule, otherwise known as the rule of 25, is not a good rule of thumb when it comes to retirement (early or otherwise). 

In fact, working out how much you need in order to retire is not something you should leave to rules of thumb.

The amount you “need” in order to retire is personal to you, and will be based on your expectations and goals and the assumptions you’re prepared to make.

For many people, the most important part of retirement planning has nothing to do with financial matters. It’s about identity, structure, finding meaning, and having meaningful social interactions and relationships.

If you want to win, you need to make sure you don’t lose. 

For many people, the most important part of their financial strategy is “defense” rather than “attack”. Insurance is often a key part of this strategy.

Insurance is really important. But not everyone needs insurance. And lots of people are over-insured – make sure this isn’t you.

You’ll never have the “perfect” amount of insurance, because you don’t know exactly what will happen. But don’t let that stop you from getting insurance. 

With insurance, the most likely scenario is that you will pay lots of money in premiums and not get much in return. That’s also the best-case scenario, because it means nothing bad has happened.

Sometimes, parents in a sound financial position can help their children by underwriting their risks.

Insurance is one of many tools for managing risks. Insurance can be thought of as a way of pooling your risks with other people, or paying someone else to take on a risk on your behalf.

Other ways of managing risks include avoiding risks (where possible), reducing the probability of a risk occurring, and taking steps so that if someone negative happens, its impact is diminished.

At the heart of risk is uncertainty. Uncertainty can be seen as a negative thing. But uncertainty can also work in your favour: in the form of “good luck”. (On that note, one of the best forms of good luck is the absence of bad luck. Also, if you’re reading this, you’re probably a lucky person.)

In the same way that you can take steps to manage risks to reduce potential downside, you can take steps to increase the likelihood, and impact, of positive events. In other words, you can hunt black swans.

When planning, you are making bets on the future. The future doesn’t exist, singular. There are lots of possible futures that can happen.

Predicting the future is hard. And in some domains, like picking stocks, it’s virtually impossible (or at least, futile).

Despite this, we are suckers for confident people making bold predictions. People who make bold predictions often reveal more about themselves than what the future actually holds.

There are domains, however, where making predictions is a worthwhile exercise. For example, what will be good for our professional prospects, and who will be good partners and friends. These predictions are personal and have high personal stakes.

Trying to predict, or “flawcast”, your financial trajectory is extremely valuable. It will place your financial situation into a much broader context. It will tell you whether you’re on the right track financially.

In many cases, goals are over-rated. Among other things, focusing too much on specific goals can result in myopia. Goals can also result in unintended consequences (the “cobra effect”). It can be useful to have a few short- to medium-term goals, but in the broader scheme of things, I think it’s better to make sure that you’re living in line with your values and priorities more generally.

When planning, one of the perennial challenges is balancing enjoying today with an uncertain future. Finding the right balance is personal to you.

Money is personal. You need to make money decisions within the broader context of your unique, idiosyncratic circumstances, needs, objectives, values and priorities – and what “wealth” means to you.

Talking about money is a great way to have amazing conversations. It can be a window into our most important values, fears, and priorities. It is a pleasure and a privilege to have these sorts of conversations with people.