Don’t Overthink It

With January behind us, how are your New Year’s resolutions going? Mid-February is typically when gym attendance returns to normal, as people remember how hard it is to maintain healthy habits. But goals aren’t limited to the gym; many make financial planning a part of their resolutions. Whether they want to start a budget, save a little more or spend a little less, healthy financial habits also start to waver around this time of year.

Finding the time and discipline to achieve year-long goals is difficult. Many begin January with grandiose plans about all the changes they’ll make to live a happier and healthier life. But change is never easy, especially when it comes to modifying day-to-day habits. In December, it’s easy to think about all the changes we’ll make. In January, we build the momentum to start. But In February, the newness wears off, and people fall back into old patterns. That’s why at some point it’s crucial to simply forgo the thinking, and just do.

For many years now, I’ve arisen from bed at 4:40 a.m. to train for both strength and endurance. My goal was simple: figure out a basic exercise routine to improve my longevity, then rinse and repeat (just like the shampoo bottle says). I believe in the simplicity of repeating proven principles, staying focused on a bigger goal, and crafting a well-defined plan to avoid distractions. I try not to overthink it. I’m not trying to be immortal nor beat God’s timetable. Rather I want to age well, both physically and mentally, so that I may one day attend my grandchildren’s weddings.

Finance, on the other hand, can be complicated. Every day, multiple news channels report which assets are moving up, down, and sideways. With endless ways to invest your money and no limit to the attention these investments may require, the path to achieving your goals isn’t clear. That’s why simplification is crucial. Not only does it highlight the necessary steps, but it frees your attention, a valuable resource, to focus on other necessities.

Like a good exercise plan, your financial plan should be simple and effective. Without having to reinvent the wheel every morning, a clear plan makes your actions easy: just follow the steps. This monotony of a simple plan frees you from being overly focused on the day-to-day movements of your finances and accounts. With simplicity in mind, here are the core ideas I use when crafting any financial plan:

1. Own or Loan

Everyone can choose to either own or loan. Historically, those who “own” (typically shareholders of successful businesses) earn a greater return than those who “loan” (typically bondholders). The reason is simple: If an owner can’t achieve a higher rate of return than their borrowing costs, they can’t sustainably borrow. Over the last century, the S&P 500 Index, (including its predecessor the S&P 90, updated in 1957) has had a compound inflation-adjusted return of 7%. That’s a 10% nominal rate less the long-term average inflation rate of 3%. Compare this to the Bond Index, which had an inflation adjusted return of just 3%.

2. Purchasing Power and the Impact of Inflation

The real definition of money is purchasing power. It’s not the number of dollar bills you hold, nor the nominal return on those dollars; this is irrelevant. The value and purpose of money is to buy the goods and services required today and tomorrow. Thus, the goal of long-term investing is to maintain or increase your purchasing power.

Inflation is the natural headwind that erodes this purchasing power. As such, we must anticipate inflation working against us. The true test of an investment’s long-term “safety” is its rate of return above inflation. This excess return protects your purchasing power over time. Ownership of businesses has historically brought a higher return than bonds or cash.

3. Dividends Make for Excellent Cash Flow

Cash is king, and cash flow is what keeps the lights on and the bills paid. That’s why we focus on dividend-paying companies. Since 1926, the dividend of the S&P 500 has increased at a rate of 5% per year versus the long-term inflation rate of 3%. This helps to maintain and increase purchasing power, even when accounting for inflation. Historically, dividend growth has significantly outpaced inflation, which we see as the goal of investing. We believe investors invest for income: either today or tomorrow.

4. Volatility is Expected

The economy cannot be consistently forecast, nor the financial markets consistently timed. The highest probability of capturing long-term returns is to remain invested. Being an owner, not a speculator, is the most consistent method of success. But businesses (AKA stocks) aren’t always priced accurately at any given moment. Stocks can temporarily decline or increase in price, but the overall trend for solid businesses favors the upside. We endeavor to stay focused on the long-term, without becoming distracted by the daily wiggle. A long-term, goal-focused, planning-driven investment plan is, in our opinion, the only true way to stay the course.

Like hitting the gym or trying to drink more water, the more you think about doing it, the less likely it is to happen. Instead of overthinking, build a plan and fall back on simplicity. Healthy habits require time and dedication, but you can lessen the load by sticking to your plan after making it as easy as possible. And when it gets hard, remember your why. I exercise every morning so I’m around to watch my grandkids grow up. Healthy habits improve investor behavior. Find your why, and build a plan to work toward it.