More ‘personal’ than ‘finance’

"We do some things for family reasons...If it's not consistent, well, life isn't always consistent.” - Jack Bogle

The late Jack Bogle is probably considered the father of modern-day index investing. An approach that aims for broad diversification and reducing costs. The multi-trillion-dollar asset management company has been built on these principles. The company he founded ‘Vanguard’ is now one of the biggest asset managers in the world and was shaped by a man whose entire life has been built upon wanting to deliver this approach to investors. Jack himself previously eulogised how this approach gives investors the best chance of a good return.

You would fairly think Jack himself runs his own money in a similar fashion. The truth is though, Jack doesn’t always follow these rules with all his money. When discussing investing in the actively managed (and very expensive by Bogle’s own yardstick) fund run by his own son, he said. "...If it's not consistent, well, life isn't always consistent.”

Should we consider Jack as being just a hypocrite? Another well-known name who asks you to do what they say, not what they do? Or, does Jack fully believe everything he spent his career building, however, there is more at play in financial decisions than just what is optimal? There is perhaps more insight from the fact that with big life decisions. There has never been a clear rule book. As Morgan Housel says of big financial decisions:

“All financial decisions are made not on a spreadsheet but at the dinner table.”

If we consider how many of our life decisions are made for the best return or the most amount of money. When it comes to family or big life choices, rarely choices are made with money first. With the cost of raising, a child in the UK being around £160,000* until 18, raising kids would not pass the first test for being financially optimal.

My non-optimal portfolio

I do not believe that buying individual stocks selection is the right way to build wealth. Not only have I made videos on this but I also would not advise my clients to invest a significant amount of their wealth in a single company. The evidence is overwhelming that trying to pick the right stocks consistently is stacking the odds heavily against you:

• In 2015 of FTSE 100 the largest 100 companies in the UK by market capitalisation. Only 49 of those companies have been there since 1999. This means that over half have either failed, reduced in value or not kept up with their peers to the extent that would retain them in the index.

• Of the original S&P 500 (500 largest companies in the US) only 94 companies remain in the index. So less than 1/5 of the largest companies in the US have remained so.

With all that factual information you may be surprised to know. I do own single stocks.** Am I just a huge hypocrite? No, I don’t believe that is the case as I don’t do this because I believe it is more likely to be a good investment. I own a small level of single stocks which are proportional to my main portfolio. A core portfolio doing the bulk of the work and a satellite portfolio for a few of these things. 

I go in understanding that all the evidence shows it is generally a waste of my time. I also enjoy understanding company structures and what may or may not be well priced on the balance sheet. Simply put, I know what is optimal but I do get some enjoyment from managing it in this way and due to that, I proportion appropriately without taking all intrigue and experience out of the situation.

The best plan is the one you can stick to

Part of real financial planning is bridging the gap between what is financially and personally optimal. With managing your finances the best plan is the one that you can stick to. Therefore a perfectly crafted plan must be able to be realistically followed in concept and reality, otherwise, it becomes an expensive doorstop.

Whether this is for you is - a larger emergency fund than is financially optimal, paying off your mortgage because of the ‘weight it lifts’ or having a small amount of your portfolio allocated to something a bit more fun!

The skill is creating that balance so you can live for now, make some compromises but maintain a long-term view. Money is one of the most personal things in the world. So being able to open up to how you feel about money, what is important to you, is part of good planning. Would these conversations around money be somewhat easier if there was less of a stigma around some ‘hidden perfect financial answer’ that everyone else is adhering to? The truth is, like living the perfect life, the perfect financial decisions are an illusion. It is better to look for an end result that is suitable and reasonable rather than pretend all of life's decisions around money are made based on perfect rationality. 

How a Financial Planner can help is clarifying your long-term goals while bearing in mind what is financially optimal. It is about the balance of these two often warring elements to make sure you stay on track for your long-term goals. While maintaining a good life in the process. It is about finding the balance between what is and has always been more ‘personal’ than ‘finance’.

* Source - Child Action Poverty 
** This is a personal story and should not be seen as a recommendation to follow a similar approach.