Financial planning in 87 words
Savers who don't understand investing also don't know how to tell good advice from bad. Here's a simple solution for them
By Dhirendra Kumar | Jul 12, 2018
It's a catch-22 situation. People who don't understand investing, and are still trying to figure things out, obviously need to take advice from someone else. However, almost by definition, they're also not equipped to figure out whether the advice they are getting is good or bad. Everyone we meet seems ready to shell out financial advice, including friends, neighbours, relatives, co-workers, Uberpool co-passengers, etc., etc. Doubtless, some of the advice may actually have worked for the person who is handing it out but it could still be utterly unsuitable for someone else.
There's an equal problem with commercial advice purveyors. If they are working on a commission (as is almost every one of them), then the advice is certain to be driven by commercial considerations, rather than your interests. So what should you do? Where should you turn for advice?
How about getting your financial advice from a cartoonist, albeit a very famous one? How does that sound? As a reader of this publication, you would doubtless be familiar with Scott Adams, whose Dilbert comic strip is an extremely funny yet despairing look at what corporate life is really like. Few people know that Adams has also written some of the best personal finance advice that anyone can get. He calls it a 'book', and its title is 'Everything You Need to Know About Financial Planning'. Except that this 'book' has not been published and is just 87 words (not pages) long.
Here it is, the whole thing: Make a will. Pay off your credit cards. Get term life insurance if you have a family to support. Fund your 401(k) to the maximum. Fund your IRA to the maximum. Buy a house if you want to live in a house and you can afford it. Put six months' expenses in a money market fund. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
Adams has a formal education and a professional background related to finance. His bachelor's degree is in economics. He also has an MBA and has worked in a bank for eight years. And yet it's so wonderful that despite these handicaps, he still talks sense about personal finance. Of course, what probably helped was that during his years as a banker, he must not have paid any attention to his professional work. Instead, he must have been just observing life in the bank, and storing away material for his future career as cartoonist.
Adams says that he did start out planning to write an entire book on personal finance However, by the time he had thought through in detail what the book would have and simplified everything to the logical end, he just had these 87 words left.
The great thing is that these 87 words do successfully encapsulate everything you need to know in order to plan your entire life's savings and investments. Obviously, in India you would replace the 401(k) and the IRA (US retirement planning instruments) with appropriate Indian equivalents like your mandatory PF, NPS and annual investments in ELSS funds. And as for the 70:30 advice at the end, all you have to do is to choose two or three good balanced funds and start SIPs in each. The earnings are even tax-free after a year.
Scott Adams has some great comic strips about the investment industry and what he has called the 'financial entertainment industry'. In one, the evil Dogbert is explaining his plan to launch a mutual fund, 'We're getting into the financial services game. That way, all our products can be imaginary. We'll start ten mutual funds, each with randomly-chosen stocks. Later, we'll build our advertisements around whichever one does the best purely by chance. My goal is to be the premier provider of imaginary expertise.' I'm sure some Indian mutual fund CEOs will recognise this strategy from personal experience.
In a following strip, Dogbert is being interviewed on a business channel. The anchor asks him, 'It's reported that your fund is the highest performer of the decade. Tell us how you made that happen.' Dogbert then says in an aside to the reader, 'Apparently, this guy will read anything you hand to him.'
Clearly, Scott Adams has a deep understanding of a lot more than office life.