Introduction
TBD
Summary
TBD
References
TBD
Complete Demo Code
Here’s the entire implementation up to this point as one file. Copy and paste it into a Java environment and execute it. If you don’t have Java, try this Online Java Environment. Play with the implementation. Copy and paste the code into Generative AI for analysis and comments.
Other Assets
There are many other assets that people may use to generate or preserve wealth, including real estate, annuities, precious metals, and privately owned businesses.
I’m acknowledging them here, but I don’t plan to investigate them further.
Asset Management
TBD
Asset Classes
There is no perfect asset. Ideally, an asset would:
- Never lose value
- Have a great rate of return
- Pay interest or a dividend
- Be effortless converted into cash
It does not exist.
I listed several set of asset above, including: Cash and Cash Equivalents, Bonds and Stocks, ETFs and Mutual Funds. I’m going to refer to these as asset classes. That is, it’s a group of different specific assets that have shared traits. For example, while stocks have similar traits, there are thousands of companies that issue stock. These are broad asset classes as well. There can be significant distinctions within asset classes as well. A tech stock will have different traits than a restaurant stock.
Each of these asset classes has traits associated with an ideal asset, but none of them have the entire package. Each asset class has its own advantages and disadvantages. Each asset class has its niche when
Cash, and cash equivalents, are very safe, but since they don’t grow over time, their purchasing power erodes with inflation.
Bonds tend to be relatively safe as well. They generate stable interest and dividends and tend to keep up with inflation, but there’s not much growth.
Stocks tend to have the greatest risks and reward along with volatility. They produce your greatest gains and losses, and fortunes can swing between the two quickly.
Asset Allocation
TBD
Asset Diversification
TBD
Summary
TBD
References
TBD
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Summary
This blog introduced retirement as something one works toward along with a brief review of financial literacy organized as your financial toolkit. The next blog entry will present retirement planning using the tools in your financial toolkit.
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Financial Management
Asset Allocation
Asset classes should be aligned to the goals they are funding. In general, the further away the goal is, the greater the risk/reward it can withstand, since there’s time to recover from any downward volatility.
Let’s consider a family with 35-year old parents with a ten year old child with the following goals:
- Car fund to replace one of the current cars in two years. This fund should be in CDs and bonds, since a new car purchase is right around the corner.
- College fund for their child. This fund should be a mixture of stocks and bonds. The child won’t start college for another eight years. The stocks will provide some growth for the interim, and the bonds will provide some stability should the stock market run into a recession.
- Retirement fund for the parents. This fund should be almost entirely in stocks, since retirement is still 30 years away. However, they will want to consider adding bonds in the next five to ten years.
Asset allocation changes as time advances. The 35-year old couple can absorb the volatility of stocks 30 years from retirement, but when they reach retirement at age 65 a portion of their retirement fund should have cash and bonds. And it should still retain some stock too. The 65-year old couple could easily have a 30-year retirement. They would still need some stocks for growth along with their cash and bonds.
Goal targeted funds often contain different asset classes, as described above. Different asset classes respond differently to different market conditions. Therefore rebalancing between asset classes may be warrented.
For example, let’s assume that our 65-year old couple wants their retirement asset allocation to be 50% stocks and 50% bonds. One year the stock market does great, but the bond market does not. Their allocation changes to 60% stocks and 40% bonds, not because of anything they did, but because of market conditions. Therefore, they may rebalance their portfolio once a year by selling some of the stock and purchasing some bonds to bring them back into a 50/50 balance. They are literally executing the old strategy of: Buy Low. Sell High.
Diversification
In addition to the correct asset allocation, the assets should have some diversity. That is, don’t put all your eggs in one basket.
While the 30-year old couple’s retirement fund should mostly be invested in stocks, it should not be invested in one stock. Everyone dreams of buying Amazon, Google, Nvidia or Apple before they became big. But for every company that would have made you a fortune, there was an equally compelling company that would have lost you a fortune, such as Enron.
One of the best ways to get diversification is through Mutual Funds and ETFs mentioned above. Diversification is built into their very nature.
Some financial companies offer targeted based mutual funds. They are mutual funds with a specific goal target date in mind. Targeted based mutual funds will readjust and rebalance among its asset classes automatically. That is, as the target date approaches, the mutual fund will reallocate asset class ratios adjusting for volatility over the years as well as rebalancing to ensure that the ratios are maintained.
Targeted funds can be good for retirement or a child’s college fund.
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Finances
The best time to plant a tree was twenty years ago. The second best time is now. — Chinese Proverb
DISCLAIMER: I’m not a financial advisor. The information here reflects my personal opinions and experiences and is intended for educational purposes only. Do your own research and consult a qualified professional before making financial decisions.
Retirement is supported by several pillars, often called the Retirement Stool consistenting of:
- Employer Pension
- Government Pension
- Personal Savings
The Retirement Stool is an antiquated model that doesn’t apply to most current workers. Employer Pensions are mostly a thing of the past, except for certain sectors, such as public service jobs. Government Pensions are at risk of insolvency.
I think there’s a fourth leg to the stool that’s rarely mentioned: Windfalls.
Windfalls come in several forms:
- Lottery - Yes, there are big winners, but they are few and far between. Please don’t play the lottery regularly. I favor Fran Lebowitz philosophy with respect to the lottery: I figure you have the same chance of winning the lottery whether you play or not. If you want to buy a ticket when the jackpot grows to incredible levels, then have a little fun, but treat it only as entertainment while dreaming about the possibilities for a few hours, because that’s all you’ll receive.
- Gambling - I lump several categories into this: Online Gambling, Prediction Markets, Day Trading, Futures/Options, Cryptocurrencies, etc. There may be some upside for these, but I suspect that most participants lose money. Much like the lottery, if it’s too alluring to ignore, treat it as entertainment, set aside a fixed budget of money to play with and have fun. Good luck to you.
- Stock Options - Yes, there are big winners here too, but don’t count on it. I joined a pre-IPO start up in 2000. My options, when vested, had a conservative value of $8M-US when compared with our public competition. Then the dot-com bubble burst. Our post-IPO start up imploded a few years later. My vested options netted a total profit of about $21.22-US. I tried not to blow it all on a yacht.
- Inheritance - Yes, there are those who inherit substantial sums of money. Trillions of US dollars will be transferred from the older generations to younger generations through the Great Wealth Transfer in the next two decades. However, inheritance is not equally distributed nor can you determine when you receive it. Your best bet for a significant inheritance is to choose your parents wisely.
The only pillar in control of most is Personal Savings. This will be the only aspect of retirement finance preparation that I’ll address here.
Tale as Old as Time
Though financial vehicles have emerged and created new investment options, the foundations of personal and household finance go back for millennia.
The Richest Man in Babylon, first published in 1926, describes the path to wealth as revealed in a set of four thousand year old proverbs from the fictional character, Arkad, an ancient scribe, who became the richest man in Babylon.
It includes sage advice such as:
- For every ten coins thou placest within thy purse take out for use but nine. Thy purse will start to fatten at once and its increasing weight will feel good in thy hand and bring satisfaction to thy soul.
- The earnings it will make shall build your fortunes … Learn to make your treasure work for you. Make it your slave. Make its children and its children’s children work for you.
This advice was author George Samuel Clason’s stylized version of Live Beneath Your Means and the Power of Compound Interest.
Clason imagined wealth management in the ancient world, but we don’t need to. Many religious texts contain passages relating to personal and household financial management.
Most modern financial principles can trace their origins back to these texts.
Continued from previous blog …
Disclaimer from previous blog.
Greed and Fear. 2008 and 2025 Tariff dips.
Goals
Retirement is the primary financial goal of this blog, but it’s not the only one for most households.
Other financial goals include:
- Home Purchase
- College fund for children
- Paying off current student loans
- The next car
- Vacations
- Etc.
Goals are not an either/or situation. A household can work toward multiple goals simultaneously. Some may have higher priority than others. There may be times, such as during a period of unemployment, when funding lower priority goals needs to be suspended temporarily.
Financial Planner
Plan
Ikigai
Summary
TBD
References
TBD
Notes
Describe the financial services commercial with the foreign car garage and chasing the dream.
https://en.wikipedia.org/wiki/Ikigai from https://www.pushkin.fm/podcasts/whats-your-problem/how-ai-could-actually-make-the-world-better
Have a plan
Do what you want to do, not what you have to do.
Get a part-time job, but consider the consequences. You won’t have as much freedom.
Volunteer. You have much more freedom. You don’t have to show up. What are they going to do? Fire you!?
https://finance.yahoo.com/personal-finance/banking/article/how-many-millionaires-in-america-205846046.html
Walking into the corn field https://www.youtube.com/watch?v=TRvJiVVVpuk
Goals
Medical Reference my church finance stuff, but don’t link to it. There’s good structure there.