I’m not much of a lawbreaker. But one Halloween some of my teenage buddies and I were having a great time throwing water balloons at trick or treaters. It was a lot of fun—until we got caught.
After getting hauled down to the police station for a lecture, and another one when I got home, I’ve been pretty much on the straight and narrow ever since.
Perhaps that early life lesson benefited me when it came to investing as an adult. I found tried and true rules of investing that were keys to grow wealth. I am so grateful for the body of knowledge I found from great investors. Especially those who had the heart of a teacher to share their wisdom.
In my investor Hall of Fame, I would include Warren Buffett for his lessons on the value of letting compounding interest work by being patient. And Burton Malkiel, for his classic book, Random Walk Down Wall Street. It taught me that the markets were so efficient that I would be better off buying index funds than individual stocks. And, of course, John Bogle, who made it possible to follow Malkiel’s advice by creating the low-cost index fund. These wise sages and others gave me valuable rules to succeed with money.
But in spite of my reverence for time tested wisdom, I also leave some space for a little flexibility.
My thesis is that we can’t expect everyone to always invest like robots. Circumstances sometimes dictate doing something with our money that may not follow the established rules for investing success.
And some investors may feel the need to take on risks as an expression of creativity. A compromise is designing a fun or speculative bucket of our wealth that is free of normal investing rules. I allow myself up to five or ten percent of my portfolio in a nonconforming bucket.
Here are four examples where I have had some fun not following the rules.
First, it is a bit embarrassing to admit that I have a position in Bitcoin. Crazy? Yes, I know. Buffett calls it, “rat poison squared.”
But even Buffett gets some things wrong. And it’s not unusual in the history of innovation to see resistance to a new idea. If you’re drinking coffee as you read this, for example, it’s a privilege that was once banned by a king.
King Charles II banned the sale of coffee in England because coffeehouses were deemed to have “produced very evil and dangerous effects.” In other words, people sat around drinking coffee critiquing the king. Perhaps the first accusation of Fake News.
In fact, from refrigeration and margarine, to recorded music, innovation has a history of being resisted. So, it’s predictable that a challenge to our understanding of money would meet with cat calls.
Whether crypto currency grows legs and changes how we think of money is yet to be determined. But, for this banker, it is an invigorating debate that challenges me to set aside my preconceived notions about money. I enjoy having some “skin in the game” just to focus my attention as the debate rages. And maybe it will go to $1,000,000!
Second, some purists may think I have sinned because I own some individual stocks. The odds of an individual investor beating the market by picking stocks are very low over the long term.
But there can be a higher good that comes from investing in individual stocks.
A key is to think of stocks, not as a blip on a computer screen, but as ownership of a company. I bought my kids Nike and Apple stock when they were little. I wanted to be able to teach them that they owned a company that made things they used.
The goal of infecting my kids early with the pride in stock ownership made investors out of them as adults.
I also love owning Berkshire Hathaway. They own BNSF, a railroad which runs through Montana. When I see a BNSF train pulling a lot of cars, I smile, knowing they are making me money. And I always remember I own Dairy Queen when I enjoy some ice cream. Adds to the enjoyment.
Third, owning whole life insurance is harshly criticized by some popular radio personalities. The argument against whole life is simple. It’s too expensive. We should buy cheap term insurance and invest the rest. But hear me out.
I’ll use one of my policies as an example. It is a $25,000 face value policy I bought in 1985. I’ve paid $312.50 a year into it every year. The cash value is now $30,500 and the death benefit is $54,887. I estimate the internal rate of return on this policy for the life of the policy is around 5.4%. Last year the return was 5.03%. It is a AAA rated mutual company and the cash value only goes up.
My counter to the whole life skeptics is, tell me where I can get a risk free, tax free yield of 5.03% today? The asset is liquid and protected from creditors. And, if I don’t cash it in, the yield will go up for the beneficiaries when I die.
I have a number of these policies yielding over 5%. If I didn’t have them, I would be keeping emergency money in a savings account earning almost nothing. They allow me to earn a decent return, and to invest more aggressively elsewhere.
I’m not advocating anyone should buy whole life. But after being told it’s a bad deal by some advisors, my evaluation suggests it’s not so simple.
Finally, perhaps the biggest rule I broke was taking on over $1,000,000 of future expenses without a clear plan to pay for it. I’m talking about the decision my wife and I made to start a family.
According to the USDA, the cost to raise a child is $233,610. We had five, so that adds up to $1,168,050. I was 29 when we had the first one. Our net worth was $20,000. We didn’t look at the cost, but proceeded on the assumption that if we lived frugally, worked hard and invested well, we would make it work.
Families like mine go ahead and make the decision to start having kids without a solid financial plan that shows how to pay for them. I support those decisions. It may seem financially irresponsible, but it’s one most parents never regret. Sometimes there is a higher good at stake than a bullet proof financial plan.
Joe Kesler
Companies that tell me how to think and feel about issues “break the rules”. My new standard rules for investing have changed to reflect my beliefs.
Good comment Mik. When we can align our investments with our values, we’re making our money work for us consistent with who we are.
Joe, thanks for your insights. We made the mistake of buying some annuities quite some time ago and were advised by our new financial planner to cash out after the waiting period, which has worked out to our benefit. We did keep one, though, that has a death benefit. It made sense to hang on to that one. One of the reasons we reigned in some of our rule breaking was that our aging minds and risk of death made it more sensible to put most investments together in a managed account. We are beating the market, but as long as I have a memory there is still the urge sometimes to venture off the grid.
Kirk, Those annuities can be tricky. You’re not the first one to regret a purchase, but it sounds like you’ve corrected it and now have your investments structured to fit where you are in life. It appears you are in a good spot now. But I totally understand the urge to venture off the grid once in awhile! Thanks for the insight into how you’re structuring things.
Joe, Thanks, I loved this article. Rule breakers are punished … I was often reminded growing up. Innovation is rule breaking by definition. I own a few individual stocks also. Less now then when I was younger. Fortunately, Bogle convinced me (and Buffett reinforced it in later years) the average person should own the S&P 500 or a broad index fund for the majority of their stock holdings. This rule (suggestion) is still valid from my perspective. I also own some managed mutual funds vs. index funds also. I find they help me sleep better. That alone is worth the extra fee I pay to own them.
Brian, as I get older, whatever helps me sleep better has a great intrinsic value that’s hard to measure in monetary terms. 😉 Great comment to put into perspective how to value when an extra fee is worth it. Thanks for sharing the way you deal with the exceptions to your investment philosophy. at least you’re not into Bitcoin like me!
We too have given individual stocks to our children. I still remember my 20 year old daughter opening the tradition robin s egg blue Tiffany box only to find we had purchased 100 shares of the stock . She has never forgotten this and to this day keeps track of the market.
Doreen that is such a great story! Warms this cold bankers heart. Thanks for sharing it.
Joe,
How secure is an insurance company that’s paying you 5.4% in today’s market? What do you think of the insurance company ratings from Martin Weiss? I don’t have a lot of confidence in the ratings from Best, S&P, or Moodys..
Dave
Great questions David.
We all learned in the 2008 financial crisis that what we thought was safe, may not be. However, my policies are in two of the big four mutual companies: Northwestern, Guardian, Mass Mutual and New York Life. I’m not an expert in analyzing mutual insurance companies, but what I read on these companies gives me comfort. Nevertheless, I keep my total exposure below the amount of state insurance that also covers them. Given both of those factors, I sleep well with them. However, you are correct in raising the question about their solvency.
I think the yield is unrelated to their safety. If you were getting over 5% in a bank money market, I’d be worried. But as I understand insurance companies, they have much longer maturities on their liability side of the balance sheet, and also on the asset side. So it’s not really apples to apples to compare a 35 year whole life policy yield with a money market. Also, for my policies, it’s more based on my mortality cost being locked in at a very low age. Also, as I understand them, the insurance agent’s commission is paid out early, thus holding down the yield early in the life of the policy. I’d study the way a policy operates in detail before taking one out. I’m not planning any new ones, as at my age they would not perform well with a much higher mortality rate.
No one should take my experience to decide to buy one. But I get tired of gut reactions against all whole life. I think it’s much more nuanced. Thanks for the comments.
I was there that fated night. I, like you, have never been to a police station again, as a miscreant. I too like you, started a family, purchased life insurance, own individual stock and… too a bet on silver futures years ago and learned to never do that again. We learned a lot of good lessons together.
HaHa! Thanks Jeff. I was not going to call you out, but since you self identified, I gotta say that was a good lesson we learned that night. We have so much in common. And we both turned out pretty well in spite of our misguided adventures. Thanks for the comment. Brought a big smile to my face!