Written by Jonathan Vance, CFP®, EA
The clients I serve have a wide range of financial backgrounds. Many are diligent savers who have spent decades contributing to their 401(k)s, and are now preparing to turn those savings into retirement income.
But beyond that generally consistent theme, some have farmland, others may have concentrated positions in company stock that’s seen exceptional growth, some may have proceeds from a business sale, have a family lake house, or others!
This diversity highlights a fundamental truth: there’s no single “perfect” way to invest. Every financial decision involves tradeoffs by balancing logic, opportunity, and emotion.
Take home ownership, for instance. Most people don’t sit down to calculate the internal rate of return (IRR) before buying a house. They choose a home because they want to live in a particular neighborhood, or because their family needs four bedrooms instead of three, not because it’s the most “optimized” financial move.
But that doesn’t make it any less of a financial decision. Buying one home versus another may considerably impact lifetime spending. That’s not a bad thing, but it is something we should be aware of.
The purpose of this blog post is to discuss how I view the concept of “investing money”, beginning with the kind of investments that you’d hold in a retirement or brokerage account, and also including my thoughts on illiquid assets that we may own for reasons beyond planning ahead for retirement.
When it comes to investments in the context of retirement planning, my investment philosophy is centered around being simple, tax-efficient and goals-based. These beliefs summarize how I approach investment decisions:
Research suggests that investors who try to time the market or pick individual stocks over long periods often underperform compared to those who follow a more passive, diversified strategy. If you’ve like to read more, here’s a link to 2013 Nobel Prize Winning Research.
Gross annual returns only tell part of the story. Over time, fees and taxes can significantly impact net performance. When possible, I prioritize investments with low expense ratios and minimal transaction costs.
In addition to expense ratios and transaction costs, there are other fees that are worth considering.
One example is tax preparation. Investments that are more complex or less liquid can come with intricate tax-reporting requirements, which may drive up your annual accounting and filing expenses. These costs don’t show up on a fund’s fact sheet, but they’re real, and they should be considered part of the total cost of ownership.
Asset allocation can be one of the most powerful drivers of long-term investment returns. I believe assets should be allocated with clear intent, whether they’re earmarked for future use or are planned to be spent within the next few years. Sometimes, a client may have the capacity to take on more risk but chooses not to based on personal comfort or emotional factors. Investing money with the future spending date in mind is often referred to as time segmentation or bucketing.
Lastly, liquidity plays a role in what type of investments are appropriate for a given situation. The ability to access funds at a given moment whether to spend them or to simply change how you’re investing them is important. I’d encourage anyone to thoroughly understand how liquid an investment is prior to owning it.
I won’t take time during meetings to gloat about returns when the markets happen to have a good year. I simply do not have any control over how the markets perform, so I won’t pretend like I “made you money” when that performance is good.
I also won’t recommend chasing a hot stock, making tactical shifts based on market predictions, or moving everything into gold when headlines turn gloomy.
Can someone get lucky? Absolutely. According to Dimensional Fund Advisors, there’s roughly a 1 in 5 chance that a single stock will outperform a diversified portfolio over a 20-year period.
If you want to take that bet, I won’t stand in your way. I just want to make sure you understand the risk involved, especially if you’re taking that risk with money you’re counting on to fund a future retirement or other financial goal.
The main thing that matters to me is that we're making rational, defendable financial decisions. In my time of being an advisor, I’ll surely advise against investment decisions that would have paid off better than my recommendation. I’ve also helped clients avoid decisions that could have caused real financial harm. That’s part of the job, and it’s a responsibility I take seriously.
If you’re curious about the return profile of an illiquid asset like a rental property or a farm, I’m here to help. Understanding the financial characteristics of each asset allows you to weigh quantitative returns against qualitative factors like management effort, tax treatment, and the risk of concentrating too much wealth in a single holding.
My family owns a farm that holds deep personal value. It’s where I grew up, and it holds countless stories. While they're not going to sell the property based on financial metrics, understanding how the investment is performing still matters.
It gives my family insight into how the land fits into a broader financial picture and helps guide informed decisions about its use, upkeep, and potential improvements. Choosing to better understand an illiquid investment doesn’t mean you have to go all in on it or sell out of it.
And if you enjoy picking individual stocks for fun, I won’t discourage you so long as it’s done responsibly. I’ll advise you not to allocate more than you can afford to lose, but if it fits within your plan to have a speculation account and you find it interesting, I’m happy to work with you. I’ll just ask for access to monitor the account to manage tax implications throughout the year.
At the end of the day, the purpose of investing is usually to support a life that’s meaningful and fulfilling. Most people don’t invest for the thrill of market moves, they invest in their future for a specific goal such as reducing the amount of time they're working or retiring altogether.
Keep in mind, there is a lot of money to be made by selling “investment ideas”. Pay attention to who is banging the drum for a specific type of investment, they might just stand to financially benefit in some, way, shape, or form if they can get you to agree with them.
What matters is understanding the “why” behind making investment decisions. The “why” is likely to include both qualitative (time, effort, desires) and quantitative (risks, fees, taxes) variables that are unique to you. I don’t believe in there being a “perfect” way to invest money, but I do believe in there generally being an appropriate and inappropriate way for any one person to invest.
Understanding “why” not only leads to better sleep at night, but it also helps filter out the constant noise and distractions, making it easier to stick to a long-term plan.
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