Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Planning Horizon: Review Benchmarks

{The Economist}
The Economist

Some waggish but wise publication, perhaps The Economist, reported on the accuracy of predictions at various times in the future. Predicting what you can accomplish in a year is almost always an over-estimate; you can't possibly accomplish that much in a year. Predicting twenty years in advance has the opposite flaw; things will change so much in twenty years, the average person will almost invariably under-estimate the future. So, what's the best time for predictions? According to The Economist, it comes out to be about six years.

Five years seems somehow easier to remember, so let's state a principle of financial planning: review your goals every five years with some professional help. The young fellow needs to have a lawyer review his will, because he probably doesn't have one. He needs someone to take a hard and sceptical professional knife to the insurance salesmen who are currently circling their prey. And someone needs to review all of the government, tax and regulatory changes that will affect a young family. For most young people, the investment decisions about stocks and bonds are small because accumulations are small for everyone except professional athletes and entertainers.

If your investment pile is small enough, you can fool around a little. My father used to say the best thing that can happen to you is to lose some money when you are young. When you become tired of that, just make regular automatic deposits into a low-cost widely diversified no-load mutual fund that is very large, say, holding a trillion dollars in assets. It will pretty surely grow steadily in good times and bad, and serve as a warning benchmark for assessing all those fly-by-night investment managers who will besiege you when you accumulate enough money to be worth fleecing.

It's a pity to waste ten or so years of investment opportunity, however. Money at 7% will double in value every ten years. You will probably want to double your nest-egg as many times as you can, which is likely to have a ceiling at 10%, so figure doubling every seven years the rest of your life expectancy, and it is easily shown that frittering away those opportunities to double is a regular, pathetic, loss of opportunity for most of us between the age of sixteen and thirty. Take your hoped-for nest egg at retirement age and double it two and a half times, and you will see what a huge opportunity is regularly lost by just about everyone.

Your parents can improve on that by making investments on your behalf, starting the day you are born. That would cause five extra doublings of your investment accumulation at retirement. But plenty of people have learned the disappointments of betting on infant futures. If you can essentially afford to throw the money away as bad luck, go ahead and do it, but if you are risking someone's college education to do it, then you had better stay away.

A probably more serious debate can be generated by discussing the risks of giving money to teen-agers, who may then get all out of social control, throwing in your face, "It's my money and I'll do as I please". The main answer to that offensive discussion is to point out just what it is that most teenagers would do if they had the freedom to do it. Some frugal cultures like the Pennsylvania Dutch will give children some money, hide it secretly in a safe-deposit box without telling the child, and then reveal it when the child seems to be sensible enough to withstand the fever of a gold-rush. The worst outcome of all is to drain the incentives, depriving the child of reasons to work hard. Unfortunately, most teenagers now grow up in a suburb, where it is difficult to conceal the probable existence of assets.


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