Finding Peace Within Personal Finance
Finding peace is a crucial step in your financial independence journey. Without peace, a plan quickly becomes chaos and years of progress can turn aggressively into regression.
According to Ramsey Solutions, "Almost three out of four Americans (72%) say they are burdened by debt, including mortgages. And two-thirds of Americans (66%) reported consumer debt, with an average of $34,055 debt load per person." Worse yet, this same 2017 study also indicated that the higher the level of household income, the greater the amount of consumer debt.
With these levels of debt across the board it is difficult to imagine that many are at peace with their finances. The most difficult aspect of debt is that it reflects decisions made in your past. Having peace with your past is certainly easier said than done, especially when it comes to your finances. However, it is not impossible. It can be done.
How To Make Peace With Your Financial Past: 3 Steps
1. Own it.
Whatever your past mistakes may be regarding personal finance, take ownership of them. Take full responsibility and recognize that you cannot change the past, but you can control the present. If you continue to blame the economy, injustices, bosses, organizational structures, and society for your present financial situation, you are putting something at fault that you readily have little to no control over. Even worse, all of the aforementioned take a very, very long time to change.
This leaves us with one option, take ownership of our situation which places the power of change firmly back within our grasp.
2. Radical Acceptance.
This step goes hand in hand with step number one of ownership. Radical acceptance involves eliminating all toxic and destructive behaviors surrounding your personal outlook on line. Eliminate your bitterness towards the world and resentment that you have for past decisions. Realize that the only path to peace, especially financial peace, is to recognize toxic behaviors as quickly as possible and quit reacting destructively to those feelings.
How? Mindfulness is an absolute must here. Meditation is an excellent practice that can show benefits even with just a few minutes per day. The trick is to be consistent with meditation above all else. The minute you lose momentum with meditation the quicker you will return to your old impulsive self. Remember, meditation has nothing to do with actually clearing your mind. Rather, it is the important practice of sitting alone with your thoughts and gradually, over time, becoming friends with your mind. Most people are too afraid to sit alone with their thoughts so they assume they are poor meditators because of this. This is the entire point of meditation. Bring awareness to your thoughts and recognize that immediately after you have them there is a small space where you get to choose how you react to them.
3. Control What You Can Control.
To move forward in a positive direction financially, focus on the things that you truly can control. Expending energy on complaining about the government, your bosses, or the weather are not only poisoning your mind but also preventing you from focusing your energy on things that you can control- such as your savings rate, reading, and otherwise sharpening your mind and body through exercise and meditation.
Admittedly, their are some things that you cannot readily and easily have control over, despite just how wrong they may be. For example, their are injustices in present society that appear to take entirely too long to be rectified. If you are black or otherwise a person of color, perhaps you do have an entirely different experience growing up than those who are white. You are not alone. Take a listen to Episode 216 of ChooseFI's podcast featuring Chris Browning of Popcorn Finance and be sure to look at the show notes of Episode 216 for some strong community voices to be heard.
Show Yourself Some Compassion
All three steps above are most successful when we can show ourselves some compassion. If we made a previous mistake, now is not the time for judgement. Rather, now is a time for action.
Keep learning about personal finance. If investing scares you, take a look at how you can start to learn about investing to make is less terrifying.
Perhaps you have no idea where to cut expenses to begin saving. Start reading articles about saving money and listening to podcasts on frugality and personal finance.
Comment below if you have some considerations for how to further make peace with your finances and begin living in the present.
The Role of Bonds in a Portfolio
We are led to believe there are certain things we need in our financial portfolio. Common wisdom implies that we should seek bonds to level out the volatility of our investments. But, is there any truth to this?
A brief review from our last post:
Stocks are traded on an equity exchange where individuals or organizations seek to purchase shares of organizations. Examples of stock exchange markets in the United States are the NYSE and the NASDAQ.
Bonds are exchanged either over the counter or as part of a fund (ETF or index). In purchasing a bond, or a similar index or ETF fund, you are lending money to either a corporation or a government entity at a fixed or floating interest rate as determined at purchase. Practically speaking, by purchasing a bond you are lending money to one of these agencies similar to the way the bank lends money to a borrower. Essentially, you are the creditor in this relationship.
Investment wisdom suggests that individual investors should have a percentage of their investments in both stocks and bonds. One of the oldest rules of thumb is to have a percentage of your overall portfolio in bonds equal to your present age. Then, over time, adjust your allocation into greater proportions of bonds as you increase in age as a primary means of decreasing your overall volatility and increasing your fixed income. Using this example, if you just turned 30 years old, it is time to rebalance to owning 30% of your total portfolio value in bonds. When you turn 40, adjust to own 40% in bonds. Etc.
Personally, I prefer a different approach. I plan to delay my investment into bonds until I am much closer to actually needing the money in my investment accounts. This would typically happen around "retirement age", which is a concept that is increasingly being revised due to the FIRE movement (Financial Independence, Retire Early).
So what would make me delay my investment into bonds? Let's take a closer look.
The Risks and Rewards of Bonds
The universal argument for owning bonds in your investment portfolio is to decrease overall volatility. As many will learn, equities (stocks or index funds/ETFs consisting of stocks) contain a great deal of volatility.
Vanguard has already done the heavy lifting on this one. Take a look at the results they came up with.
100% Bond Portfolio from 1926–2018*
In the 93 year period between 1926 and 2018, stocks nearly doubled the return of bonds (10.1% vs. 5.3%). However, bonds had a positive return 79 of those years while stocks had a positive return in only 67 of those years. The 12 year difference in positive returns in favor of bonds are why many folks choose to hold them.
Further, the worst year for bonds was an 8.1% loss (1969) whereas the worst year for stocks was a 43.1% loss (1931). Imagine your portfolio showing a -8.1% return in a given year, versus a -43.1% drop in value. If you have trouble imagining such a significant drop and would be likely to sell during such a period, perhaps owning a greater percentage of bonds in your portfolio is an idea worth considering.
Keep in mind however, the trade off for stocks is that typically the greater risk is usually for a greater potential reward. Past results are not an indicator of future performance however!
Do Bonds Offer Diversification?
When considering bonds for a portfolio, the typical investor seeks diversification into different asset classes. Ideally, these asset classes should have a correlation as close to 0 as possible. For those folks into rebalancing, a negative correlation is even better.
When a correlation of 0 exists, the two items you are comparing are believed to have no relationship with one another. The closer an asset class gets to -1, the more the two asset classes move in opposite directions with one another. It is important to note that we will rarely, if ever, find asset classes that consistently move in the opposite direction of stocks.
It has been long said that stocks and bonds have an inverse relationship with one another. Conventional wisdom says that when stock prices are up, bond prices are down. Conversely, when stocks drop, bond prices tend to increase because investors are typically seeking bonds for stability and decreased volatility during market drops.
However, this is far from a universal rule. In fact, stocks and bonds have recently been moving together. As of 2020, many investment grade and corporate bonds show a positive correlation with stocks. Further, many sources such as Morningstar have demonstrated a correlation greater than 0.5 (the closer to 1 the more related two asset classes are).
The authors over at Seeking Alpha have a great article showing how the diversification into different asset classes has been diluted since many asset classes move together (correlation closer to 1). Check out this article and take a look at the last chart on the page. The darker the shade of gray, the more closely related two asset classes are.
"Food" for Thought
Perhaps you read all of this and discover bonds are a safer alternative than stocks and you choose an aggressive bond allocation (somewhat paradoxical). Maybe you review the notes above and decided the complete opposite, bonds are for the faint of heart and stocks are the way to go. Either way, I would consider reviewing this article, and any notes you have taken, annually to see if you still feel the same way.
I will leave you with somewhat of a reaching analogy. Stocks and bonds are somewhat related to Aesop's classic fable of The Tortoise and The Hare. It's not a perfect analogy because stocks (hare) typically do beat bonds (tortoise), but it outlines the importance of where you are presently in the race of life. As mentioned above, the older the investor the greater the number of tortoises in their portfolio. Why? Slow and steady is believed to win the race. However, consider that you may want to be the hare in the beginning of the race, and switch over to the tortoise down the road to get the best of both worlds. Regardless, consult with your financial professional prior to making any lasting decisions.