Tuesday, February 09, 2010

Naive Investor Interlude 1: The First Investment Decision

Most people go for financial advice after they have already made the decision that will have the greatest benefit on their wellbeing.

If we adopt a simple principal of investment, that we should concern ourselves with the scarcest resources first - then many fail to look at or evaluate the most precious one.

Many may argue that generally land is the scarcest resource since 'they aren't making any more of it.' But by the same logic, crude oil becomes the scarcest resource because not only are they not making any more of it, people are actively destroying what remains every day.
But from a personal standpoint the scarcest resource hasn't yet been touched - time.

Time is unique in that you only have so much of it, and it gets spent whether you make a decision or not. This usually points to things like 'time management' no doubt important, but thats still a bit too advanced a question for this interlude.

The first investment decision is how you are going to spend your time, and most people will get financial advise without touching this question at all. Likely because a 'financial advisor' is not a 'career advisor'.

An argument can be made, for not saving and not investing for later life because we should enjoy our lives while we are fit, healthy and unattached. Not only does this lead to disastrous youth financial management (being up to their eyeballs in debt before their first full time job) but its premis is false.

To assume that the 'old you' will not desire to enjoy life is a big and incorrect assumption. Nobody resigns themselves to 'I'm not at my athletic peak anymore, therefore I will accept the good times are over and lead a life of poverty and misery.'

You will desire International Holidays and beach resorts as much later as you do now. The reverse argument though is also false - the 'defferred happiness' syndrome.

That is where you sacrifice now in order to afford a better tomorrow. Resigning yourself to a miserable 25 year career in order to afford some luxurious orgy of a retirement.

Most people can reject the 'deferred happiness' on an intellectual level because it is uncertain whether through sheer fortune you will survive long enough to enjoy your retirement.

But still many fall into the trap.

Assume 1/3rd of your day is spent sleeping, 1/3 on recreation and 1/3rd at work. 30% of your time portfolio is dedicated to a job.

Do you like that job?

That is the first question of investment. How are you investing your time? While it may seem important to earn money, no amount of money can buy back time. Vast amounts of money may be able to buy some time when you are at your physically least capable but the exchange rate isn't efficient. Still the price of time goes up like anything else when it becomes most scarce.

Nobody would take on a $500,000 mortgage at 20 to buy 13 more days, but you could bet the late Kerry Packer would have.

Furthermore we can assume that 1/3rd recreation time wil be spent with your family. Do you like your family? Is your marriage a happy one? Difficult questions but vital to your day to day quality of life.

Work and family contributes so much to happiness, that its surprising more people don't get career advice before financial. As if 10 years of great retirement are more valuable than 25 years of day to day office life.

Work should contain enough stress to keep you buzzing, enough challange to make it interesting, a social outlet for you, and it should tap your talent reservoir. Getting those things will make such a difference for you now, the cumulative benefit over your career may be more valuable than a vast retirement nest egg.

Furthermore, there's no reason really that you can't have both. Most people just skip right over the first question: 'How are you investing your time?' and go straight to retirement plans. Cutting out a whole stack of obtainable lifestyle goals.

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