Welcome to the latest edition of “Weekend Reading For Traders”. We kick things off with an article that emphasizes the need for investors to find a style that works for them. stick to their process and discipline, and (above all) keep capital preservation as their number one goal.
From there, we highlight a recent article that contrasts the advice given about personal finance by popular “experts” and the advice that economists about our personal finances with more “traditional” academic thinking and move on to an article that shares some tips on what retirees can do to dampen the discomfort of taking their required minimum distributions this year (as RMDs… and the taxes that are paid on the withdrawals… are based on account balances at the end of last year when the indices were at, or near, record highs).
We wrap up with a pair of articles about happiness. One discusses how some families are taking more time to consider whether or not their sending patterns align with their priorities, and the other shares some ideas on some simple things we can do to increase our own happiness.
And with that, we hope you enjoy this latest installment of Weekend Reading For Traders.
(Darius Foroux | dariusforoux.com)
Of the many market axioms that investors have relied on for more than a century now, “cutting your losers and letting your winners run” is probably the easiest to appreciate but is also one of the hardest to actually implement. As many newer (and even some seasoned) traders have learned this year, it’s easy to let emotions cloud our judgment when our portfolios start to rapidly decline, and instead of sticking to our plans for each and every trade, we watch as losses mount… which, at the end of the day, discipline as an investor is paramount. There will always be an endless supply of opportunities in the market, and that’s why it’s so important to make sure our priority is making sure we have enough capital to live to fight another day. Accordingly, Foroux suggests that investors should (as Warren Buffet advises) at all times stick to their circle of confidence… that is, for every opportunity that presents itself, ask “Do I understand this investment”. For some, that might mean staying away from trading options or currencies. For others, that might mean sticking to small-cap momentum names or a few tried-and-true technical patterns. The point is that there is a multitude of ways to invest and build wealth, but that doesn’t mean that we need to pursue all of them.
(Greg Rosalsky| Planet Money)
There’s no shortage of advice from personal finance gurus about how we should manage our money. The question, however, is if their advice really helps people make the best decisions about how they allocate their limited capital. In a recent study titled, “Popular Personal Financial Advice versus the Professors,” James Choi, a Yale economist, compares and contrasts the advice from 50 of the most popular personal finance books to see how they measure up against traditional economic thinking. Along the way, Choi emphasizes the difference between old-school economists, and behavioral economists (who account for the fact that people act irrationally), and examines how (and when) people should be saving for retirement, whether we should use separate accounts for specific budget items, how much individuals should allocate to equities, and if dividends really matter. Ultimately, Choi tips his hat to the gurus, because, while their advice might not be empirically optimal, it takes into account the fact that humans will human, and that the best strategy isn’t necessarily the “best” strategy… its the strategy that people will actually implement!
(Ashlea Ebeling | The Wall Street Journal)
Amid all of the year-end hustle and bustle, as well as the goal-setting and strategizing for the upcoming new year, financial planners typically spend the final several weeks of the year focusing on tax planning with their clients, which for those in retirement, including figuring out the best options for taking required minimum distributions (RMDs) from their retirement accounts by the end of the year. And, as Ebeling points out, 2022 will be a particularly tricky year for making those withdrawals, as the amounts that must be taken are based on the accounts’ ending balances at the end of the previous year, when the indices were sitting at or near record highs, just ahead of the rapid decline that began in January. While a few of the author’s suggestions might be food for thought for years ahead (such as using income-producing assets, like real estate, to fund RMDs, and setting up monthly withdrawals versus taking distributions in one lump sum), she also offers some proactive strategies, including taking “in kind” distributions by transferring beaten-up shares into a taxable brokerage account, making qualified charitable distributions in order to offset some of the tax burden, and proactively increasing the size of the distribution in order to take advantage of “today’s historically lower tax rates [which are] set to climb in 2026” (up to the point of moving into a higher tax bracket_ and using the proceeds to fund Roth accounts and/or gift the money to heirs.
(Maddie Burton | Flow Financial Planning)
Inflation remains the most pressing issue for US households, especially since increasing consumer prices have far outpaced wages, meaning that even higher-earning families are finding that they need to be a lot more budget conscious. As a result, many families have taken a closer look at their spending habits to make sure that they are allocating their dollars to those things that make them the happiest. In this article, Burton shares the things that Flow Financial Planning’s clients have spent their money on that have brought them the most joy, including home improvements (and upgrades), items that allow them to spend more (and better) time outdoors (such as higher-end bicycles, better tennis rackets, ski equipment, and campers), upgrading everyday items (like coffee makers, headphones, towels, and furniture), advancing their education, and giving back (with both their time and treasure), among several other things. Because, at the end of the day, increased constraints on our resources means that families should take some time to consider if the things that they’re spending their money on truly align with their own happiness.
(Eric Barker | Barking Up The Wrong Tree)
In a world where there’s an endless supply of distractions and a seemingly relentless pressure to be as busy as we can possibly be, it’s no wonder many feel that there’s little time to do the things that make us happy. In this article, Barker shares some insights about some simple things we can do to bring more pleasure to our lives by looking to the ancient Greek philosopher, Epicurius. While Epiurius is widely misunderstood, Barker notes that he distinguished three types of pleasure: necessary pleasures (like food, free time, family, and friends), extravagant pleasures (such as fancy meals and expensive vacations), and corrosive pleasures (like wealth, power, and fame). Unfortunately, it’s all too easy to get our priorities wrong and allow the second and third pleasures to interfere with necessary (and most important) pleasures. Accordingly, Barker suggests that we conduct a “pleasure audit”, actively appreciate the state of having “enough”, and make friendship one of our top pleasure priorities. Ultimately, Epicurius emphasized that “pleasure makes us resilient” and that focusing on creating strong bonds and lifelong friends will give us the strength to deal with life’s inevitable hardships.