(Some of) What I've Learned

In the 10 years that I have been writing about finances, I have learned that the most important quality to obtain is clarity of understanding. Note that I did not say correct judgment is the most important, for you can never be quite sure about the might-have-been question, even with vaunted 20/20 hindsight. When Chou En Lai, the late Chinese revolutionary leader, was asked what he thought about the outcome of the French Revolution, he replied, "It's too soon to say." So uncertainty will be our steadfast companion throughout our personal financial life, as in other areas.

Still, we are all compelled to make daily financial decisions, big and small. (Sometimes we can't even tell the difference between what will turn out to be big or small.) The “law of unintended consequences” always plays an important part in our lives. We try to understand, as best we can, to minimize the surprise element in financial affairs and we resign ourselves to the bald fact that surprises, of whatever size and shape, will always shadow our lives.

I must confess that even "happy" surprises, windfalls of whatever ilk, make me a bit nervous, if less so than unhappy ones. Unexpected losses, such as a sudden downturn in the stock market, remind us that what happens to us and our money is not completely under our control. Happy surprises are just a low-stress way of being reminded of that fact.

One way to improve our odds financially is to stay actively involved -- for every action you take to stay on top of your finances, you increase the probability of a positive outcome. It’s one of the reasons most experts recommend that we remain invested at all times, to maximize our chance of success. The biggest gains occur only a few times a year, but no one can predict what days those will be, so we hang in and implement dollar-cost-averaging. Diversification also helps, because no one knows where lightning will strike either. So we cover the bases, in whatever proportion we deem suitable to our situations.

Diversification also works as a damper on loss for those worried about the down side of unpredictability. The market swoon of 2008 was the rare exception to the long-standing observation that various kinds of financial instruments and investments cycle unattached to each other, which is the underpinning principle of diversification. The market reaction in 2008 was an anomaly, a gigantic anomaly, but happily for those who did not panic and held firm, the financial markets have continued to climb back.

In addition to the importance of clarity and wisdom, for most folks financial success is based on just a few simple, big ideas. There are basically three things that you can and should do with money: acquire it, save it and spend it.

On the acquisition side, most of us are limited to earning money with our professional skills. We hope that this process will turn out to be sustaining, satisfying and maybe even fun. (Wasn't that first paycheck from your medical practice thrilling?) And earning as our primary means of acquiring money gives us more certainty than the long shots of inheriting, marrying or stumbling into money.

Even if you never experience a large inheritance or win the lottery, doesn't it seem that people who have carry an extra load to tote? I know, I know … it’s a burden you would love to have. The folks I've seen who have dealt with such luck end up working pretty hard to maintain the windfall.

The next category, saving, speaks for itself. We all do it, rich and poor alike. The pertinent questions are how much can and should we save, and where should we invest it. These are simple questions with many answers, some not so simple. That complexity is part of the reason for the large population of financial advisors. We might not want to save, but starting early particularly, and keeping to a regular program, always works to our long-term advantage.

Third comes spending -- the opposite of saving and an activity most of us have mastered. Borrowing also falls into this category. Yes, you may eventually make money if the debt was obtained to purchase an asset that is likely increase in value, such as a home. But loans always start as a guaranteed expense that should not be ignored.

On the consumer side of spending, Americans are the first large population in human history to experience having “disposable income,” let alone having the opportunity to enjoy it. And we have embraced it with a vengeance.

The last view for the day is that over the years we learn in medicine that one of the characteristics of the best physicians is learning to observe and manage detail closely. So, too, in our financial affairs -- watching the store, over time, usually pays off. Many try, with varying results, to paper over their inattention and subsequent waste by simply earning more income. We think that money is always obtainable. But that can become an exhausting treadmill and ultimately needless if we simply pay closer attention to the money we’ve already earned.

It is true, I will admit, that making and saving more money can be a wonderful lubricant for smoothing life’s small bumps in the road. But keep in mind that while affluence is a blessing, having a lot of money itself may not be as wonderful as not having enough money is terrible.

If you have some-hard-won insights of your own, pass them along and we will all share. Cheers.