For what it is worth, I don’t encourage calling me “Dave.” My wife, my pastor, and some close friends call me that. I learned to love my given name when I became an adult — David is a wonderful name, and I am glad my parents gave me that name. It is an informal age, with the benefits and problems thereof.
On with the scenarios:
4) I have had short jobs: helping a young man to decide whether to buy a house or not. My counsel: not. So far so good. Helping an older lady figure a complex tax basis of stock her father left her inside a DRIP. A pain but a finite process.
5) A friend my age (50s) who runs a successful business asked me for advice ten years ago. My advice was don’t run with negative working capital; leave some margin for error. It took him nine years to figure out that I was right, and the business suffered 3-4 near death experiences en route. Now he is more profitable than ever, and was grateful for my advice. As a shareholder, I am glad that he listened.
6) A younger friend (30s) who runs a successful small business who asks what he should do with his excess money. I told him to put it in Vanguard’s Balanced Fund, or the STAR fund, if he really did not need it for his business. But he is the sort that always wants to do the best, and feels mediocre results are laziness. I have told him, focus on your business; it is what you are best at. What you earn on spare cash balances, particularly in this low-return era, will not avail as much as you could by selling more, and providing good service.
7) A friend (50s) a few years older than me has been put to the test. His employer has offered him a severance package if he leaves of a little more than one year’s income. His pension, if taken today, will barely cover expenses, but is roughly equal to his salary. He has no savings, and has helped put 3 of his 5 kids through college, with 2 to go. I advise that he continues to work, and that he turn down the package, because it is unlikely that he could get work nearly as remunerative. Risk: his company folds, and he loses the package.
8 ) A friend (50s) who has planned asks whether his plan is wise. I told him that the asset allocator using DFA is pretty smart, and and the cost is reasonable. Beating the S&P 500 over 9 years by 4%/year is hot stuff. My only critique is that it is a 100% equities program, which is fine if you can live with that level of volatility.
9) My pastor came to me in 2007, asking whether he should still be in the money market fund for his defined contribution plan. I had been waiting for this moment, because he was too cowardly in investing, but it was the wrong moment. I told him to take the moderate allocation, because moderate and aggressive allocations do the same over time, but the moderate will let you sleep. He came through 2008 like a trooper, with the losses, and bounced back in 2009. The mix will do him well over the long run.
His case made me look over the denominational plan. I concluded that the asset allocations were set one notch too high at each level… technically, the percentages allocated between risky and safe assets might be correct when thinking about lifespan, certainty of future earnings, but does not take into account the fear factor so well, i.e., people changing their strategy in the midst of panic, at the wrong moment.
So I let the pastors know that, and told them to shade their asset allocations to the conservative side last June. It does not help that we are in a period of debt deflation, which will retard asset appreciation for some time. It is harder for asset prices to rise, when the buying power from debt is diminishing.
And yet there are more who want my advice but haven’t sent me the documents yet… It reinforces to me that most don’t know what to do with excess money.
Perhaps that is a lesson — most people are technical specialists, and do their jobs well, but many are ill-adapted to managing their excess funds wisely. Another reason to end Participant-directed defined contribution pension plans, and create trustee-directed plans, or even defined benefit plans.
Yes, this is a paternalistic view, and is at odds with my normal libertarian ways of thinking. As policy goes, let people be free to have whatever savings/investment plan they like. But if you care for those that you have some charge over, create a plan that takes the investing out of their hands. Then make sure that it is prudently invested.
And in the end, remember, though it is almost always better to have more than less, invest in such a way that you, and those that rely on you will make it to your goal comfortably. Just as valuable is the ability to sleep at night, and know that your plan has enough slack to enable you to take some hits, and come through fine.