I created an Excel spreadsheet for my last financial report card. We’re still making good progress. As you can see, we’re still on a good path. Our total savings went down, because we paid off a little more debt than, strictly speaking, we should have. The metric here I’m really looking at is our savings rate, and how we’ve reduced spending over the previous month. We were down a whole 20% over what we spent in January, even though our goal was only a 10% reduction. I’m fantastically pleased about that! Our emergency fund isn’t as robust as I’d like, and our percent on that actually moved in the wrong direction because we paid off a little more debt than we should have.
Getting the 10% reduction in spending that we’re aiming for in March will be difficult. We paid a six-month auto insurance premium in March, and had a significant car repair. We’re going to have to really tighten things up to make that 10% goal, but I’m hopeful that we’ll be able to do that!
In my piece on the Four Percent Rule, I talked about Jeremy Grantham’s November 2012 essay, “On the Road to Zero Growth1. In that piece I listed some of the marvelous recommendations Grantham has received from the likes of Bogle and Bernstein.
Mr. Grantham forecasted that GDP growth for the US is going to be about 1.4% a year, or 0.9% adjusted for inflation. (Specifically, he forecasts 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050.) This is in contrast with the greater than 3% growth rate we’ve had for more than 100 years.
I lamented that Grantham did not discuss the investment implications of this low-growth forecast, instead promising it for a future newsletter. Well, Grantham has delivered in his latest, titled, “Investing in a Low-Growth World.”
I was concerned that a lower-growth forecast for GDP would result (if it was accurate) in lower investment returns. But I pointed out that Bernstein, in Chapter 4 of Investor’s Manifesto, said investment returns are often the opposite of those for a country as a whole — “high grade” countries often have mediocre results, and mediocre2 often have spectacular results.
Grantham backs up this view, showing that there is a mild negative correlation between GDP growth and stock market returns. Grantham and his company, GMO, have gone back 100 years for developed and emerging markets and have confirmed the same negative correlation.
All this means is that we don’t really have to worry about Grantham’s prediction, at least through the narrow lens of picking investment vehicles and portfolio allocation.
I recently finished ”Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals,” by Larry Swedroe. The Warren Buffett stuff is just a facade — a shtick to get investors who are frightened by scholarly works to read the book. Nevertheless, the book is worth reading, and is generally well-written and accessible. As far as I can tell, it’s correct in all of its prescriptions. None of it really breaks new ground, but it’s a book worth reading.
One particularly new bit of information I got from it was the “Opportunistic Rebalancing” approach to rebalancing a portfolio. The idea is that you check your portfolio often for opportunities to rebalance it (weekly or even more often) but, because you’re only rebalancing when your portfolio gets outside a tolerance zone, you’re not actually rebalancing (and incurring trading costs) that often. As I wrote about in my Chapter 6 notes from Investor’s Manifesto, William J. Bernstein doesn’t recommend it, but it’s certainly not a dangerous idea — per Bernstein it’s simply a lot of work for probably not much gain.
So what the bottom line on this book? It’s worth reading, but it doesn’t replace “Investor’s Manifesto” as my pick for the first book you should pick up in your quest for financial competence. It’s hard to match Bernstein’s incredibly clear and well-written prose. Swedroe is good, but Bernstein is better. I’ve added this book to the Reading List in the “Optional Reading” section.
It’s time for my end-of-month financial report card, this time for January, 2013.
I’m intelligent, talented, have a good job that pays me well, and have had more good luck in this life than I deserve. So why am I broke?
Broke? Yes. I’m 40 years old, have zero credit-card debt, few savings, owe back taxes, and my wife has student loans. Our net worth is negative.
I think there’s three reasons why we’re broke, and I think they may apply to many readers as well, so I’m going to talk about them here.