The New Realities of Personal Finance

Ron Lieber, Cubs fan and new personal-finance columnist for the NYT, has hit a home run with his first at-bat: "Five Basics for Building a Solid Financial Future" is top of’s Most Emailed list, not just for the Business section but for the site as a whole. In it, he does a good job of summing up his investment philosophy in seven words:

Index (mostly). Save a ton. Reallocate infrequently.

I like the fact that Lieber includes saving as a subset of investing. This is true for everybody, even people with eight-digit trust funds: the less money you spend today, the more money you’ll have tomorrow. But even Lieber doesn’t seem to like to dwell on this fact: he says that indexing, not saving, is "the hardest part of the mantra to accept"; he doesn’t mention that saving, not indexing, is the hardest part of the mantra to actually implement.

The long secular decline in the US savings rate is going to be a painful thing to reverse. The rest of the world has done a sterling job in doing our savings for us and then pouring all that liquidity down the ever-willing throat of the US consumer. But none of this is sustainable, and the housing crunch is just the beginning of the inevitable hangover.

In a world of easily available debt, everyday frugalities become forgotten about. The ubiquity of credit cards doesn’t help either: I’m in Berlin right now, where no one uses credit cards, and you really are much more aware of how much you’re spending when everything is paid for in cash. But I fear that credit cards did for US consumer expenditures what the CD did for music sales: plastic technology can boost them significantly on temporary basis, but after that it’s all over.

There’s also an element of all-American "yes we can" optimism to spending on credit cards. Amanda Clayman quotes Tad Crawford, who sees debt "not as merely an obligation to be paid but also as a statement about how our inner richness will be expressed in the future". One of the reasons that Americans don’t mind low taxes for the rich is that they hope and fervently believe that they, too, will be rich one day. And if you’re going to be rich in the future, it makes sense to borrow money in the present.

The problem, of course, is that generally the people who become rich in the future are those who save money in the present. Which is most inconvenient. That’s one reason the housing boom was so eagerly embraced: the people who took on the most (mortgage) debt were the people getting rich quick, as "buy the most expensive house you can afford" became a recipe not for losing everything but rather for becoming a millionaire.

Even Lieber is still in the mindset which treats a home as an asset, not a liability: "the housing downturn," he says, "has affected the largest asset in many portfolios". I’d take issue with him there: a house is not a portfolio asset. It’s true that paying down a mortgage is, over the long term, a pretty effective way of saving money – it’s a commitment device which forces homeowners to build wealth rather than spend. But note the real source of wealth creation here: it’s not buying the house, it’s paying the mortgage.

Lieber’s right, though, when he says that investing is hard, and that there are definite upsides to hiring a professional to help organize your financial life. If you’re investing your money with a fund manager, you should never pick someone who doesn’t have some kind of risk officer providing oversight of what he’s doing. Now those risk officers don’t always do their job, as we’ve seen. But every professional investor benefits from having a second pair of eyes which belong to someone who’s paid to worry about downside risk. And what’s true for professional investors goes double for amateurs. Individuals simply aren’t the best people to make their own investment decisions, most of the time. That’s why Bryan Lourd was an interesting person for Michael Lewis to profile: he isn’t smarter than his clients, and he’s certainly not out to provide alpha; but he helps enormously in terms of discipline, forcing them to invest sensibly.

Ultimately, of course, as the name of Lieber’s column says, your money is Your Money, and you’re responsible for spending it, saving it, and investing it. A financial adviser can help build a plan, but you will have to implement. That’s a bit scary, and a bit new. A generation ago, it was still quite common to find people who didn’t have credit cards (or outstanding credit-card balances, anyway), who balanced their checkbooks, who were slowly paying down a mortgage, and who belonged to a defined-benefit pension scheme. Their finances were generally pretty healthy, thanks to a fortuitous combination of circumstance and necessity. Such people don’t really exist any more. And we’re still struggling with the repercussions of that shift.

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