As in dieting and movement, you can think of finances from a Paleo or ancestral perspective. Bear with me on this, it will make sense. Our ancestors may have not been investors as we understand them today, but they had to make critical choices on how they expended what little resources they had and what few assets they would accumulate. Kind of like us! For the most part the choices they made reflected acquiring assets that had long term or continuous value. 20,000 years ago tools, spears and hides were of paramount value. Think about it, a Neanderthal with a particularly strong and durable spear had a very precious and rewarding commodity, one that could bring returns like food or clothing for a long time. A very good investment indeed. The assets our forefathers acquired returned continuous value. In harsh conditions, hoarding goods that could not return long term value was more than frivolous, it was potentially dangerous. I think we can learn a lot from this. If you adopt a philosophy that your resources should be primarily spent acquiring assets that return significant value you will be well on your way to financial success. Invest like a caveman! Because investing is arguably the most important tool in your path to happi healthi finances.
Put simply, if you want control of your financial future you need to build assets. There are lots of paths to doing this, including investing in stocks or starting your own business. Whatever path you choose to build your financial future, the best way to succeed is to have a plan and diligently execute it. Write your plan down. Revisit it frequently. Know it and live it. This is very important. Without a plan your chances of succeeding get a lot slimmer. Doing nothing and hoping for the best is not a plan. Here are my fundamentals to help you start your plan.
1) Save and build your assets. Start today. Assets are the key. While there are many ways people have achieved financial success, in my opinion, the best way for most people is through the ownership of appreciating assets. Businesses, Stocks, bonds, ETFs, mutual funds, real estate, commodities are asset classes that historically have appreciated. Cars, Comic books, high end clothing, other consumables, tend to depreciate – meaning they lose value over time. Not good investments. It’s better to spend money on owning things that increase in value. Seems pretty simple but are you doing it? Are you making it a priority? Even if you are just starting with $500, open a brokerage account and start now. Max out your 401K at work if you have a 401K. Whether it’s $5 a week or $500, consistently save so you can take that money and build assets. For most people ownership of Stocks, Mutual Funds or (my favorite) ETFs are excellent choices to begin with. For the average American the largest asset is often their home. It’s the American dream. But remember its only one of the many assets classes you can and probably should consider owning.
If you can, save 10% of your income every year.
How do I personally invest my precious resources? Here’s my happihealthi spending hierarchy
1a) Necessities (rent, utilities, transportation, the kids, etc.)
1b) Healthy foods
2) Assets that appreciate
3) Great experiences
4) Assets that depreciate slowly
5) Anything that depreciates quickly
Assets that depreciate slowly include things that you’ll get a great deal of use out of like high quality clothes that you’ll wear a long time (and fit into a long time because you are eating the right way!)
2) Live below your means. For some this may be difficult or impossible. But as you continue to improve your financial situation it can become more possible to do. Just do it as soon as you can. Then take the savings and build your assets. Never “Keep up with the Jones.” It doesn’t matter what they wear, drive or look like. Live below your means, build your assets, and retire before the Joneses. I think this is one of the biggest barriers we have to building assets – comparison to others and our need to spend to compete with them. As Kierkegard said “Comparison is the root of all man’s unhappiness” Don’t fall into this trap. It’s ok to drive somewhere in an old Honda when everyone else is driving a new Mercedes. You both still arrive at the same place.
3) Diversify. This sounds cliché but it really is critical. In large part for protection. You don’t want all of your money in your house when the Real Estate market turns against you. Real Estate is historically around a 17 year cycle from peak to trough. That’s a long time to wait to recoup all your money. I’m not singling Real Estate out. Im just using it as an example. Fortunately different asset classes usually have different cycles and can move in opposite directions. So when one is down the others may not be fairing as poorly some may even be rising!
4) Attempt to eliminate extraneous costs wherever possible. Take the savings and build your assets. Everyone has unnecessary costs. Paying too much rent or property taxes, leasing instead of buying autos, paying cable bills when you can get your favorite programs on the web etc. Many expenses are life style choices. That’s ok. But seriously consider whether you need them. If you can live without them do it. BTW, this applies to investing too. Be aware of fees when investing. Some mutual funds are notorious for having very high fees. Those fees will cut into your returns. ETFs are the better choice in my opinion. Always look to eliminate or reduce fees and costs.
5) Understand your time frame and stick with it! This is one of the biggest mistakes investors make. Don’t buy a long term asset and then get nervous about short term moves.
6) Don’t watch CNBC or other financial news shows for investment advice. They don’t know you, don’t care about you and can’t help you. It’s entertainment only. I’ve seen reports of people tracking these tv celeb stock pickers and the results are not impressive. Their goal and motivation is to get viewers, not to help you.
Related: When it comes to great stocks – “Those who tell don’t know. Those who know don’t tell.”
7) “Buy low sell high” still holds true. Yet most of us do the opposite in the market. We buy when others are buying and prices are high. We sell when everyone else is selling and prices are low. Another way to think of this perverse phenomenon with appreciating assets is to compare it them other things we purchase (eg. shoes or cars). We love when shoes or cars go on sale but when tradable assets like stocks go on sale (by dropping significantly in value, sometimes called a “correction” or at worst a “crash”) many get afraid and want to sell them! Now if a TV price drops 50% we line up at 4 am the day after Thanksgiving! Hmmmmm. Change your mentality. Be a long term investor and don’t panic. If anything, be opportunistic and start looking to acquire inexpensive assets you believe in. As a long term investor those few times you feel panic are often buying opportunities. What happens to great stocks in crashes and corrections? For the long term investor they eventually come back a lot higher!
8) You don’t need a stock broker or financial advisor. Unless you have a lot of money. And until then you can do very well with just yourself and if needed, a good accountant you trust.
9) Did I mention save money, build your assets and write down a plan?
I believe Paleo Investing or Ancestral Investing is a good mind set for long term financial success. Consider your resources to be scarce and precious. Use them to acquire assets that will continue to return real value. Invest like a caveman!