Familiar Rules Break Down

When I was young there were some financial guidelines.

  1. You can afford a house if it costs less then 24 months income.
  2. A car should be no more than 6 months income.
  3. Invest 10% of you income
  4. The stock market part of your portfolio should be less than a hundred minus your age percent

Times have changed

You may have noticed.

We bought our first home for about two times income. Cars fitted the mould too. Our 10% was invested in repaying debt and education. We had no portfolio, just a tiny emergency fund of about three months spending. My annual salary was the equivalent of about 25 ounces of gold per month.  Those were the days and we didn’t know it.

Today, it would be easy at that gold based salary, but for the rest, no so much.

The average home price in the city is around $800,000. Cars are not up so much, but are still expensive to pay cash. Zero percent financing makes the payments affordable. 10% to 12% financing long ago added substantially to that cost.

Ten percent is still ten percent but the stock market allocation is not commonly followed. Why? Because the “safe” part of the portfolio returns a net real income after taxes that’s negative. It’s hard to get ahead when the purchasing power of your investments falls each year.

People move up the “risk” curve

The invest a larger share of their portfolio in stock market equities instead of fixed income bonds and bank deposits.

Will that work out for them? Probably yes in the long run, but there will be some anxiety in the interim.

Stocks are not especially risky if you look long. Over the past 75 years the average total return is more than 10%. Take away fees, other costs and taxes and you still come in around 7% or more. Take out inflation and keep 4% or more.

The problem is we keep track as we go.

There is a big difference between average, and actual this quarter. How many people say, “Oh well. It’s down 30%, it will average out.”

Not many in my experience. Anxiety and fear is not your friend. By the same token, euphoria and greed provide weak counsel too.

Market volatility is a fact of life and until you know how you would deal with it, study markets before investing. Not everyone will be a good stock market investor.

For the rest

There are rules that apply.

  1. Know when you will need the money. If it is more than ten years away, you can ignore the quoted prices. That assumes you own good business and the business environment has not changed too dramatically. If governments remain inept, you might want to factor that in too.
  2. Know how much you need then. All in a lump is a lot different than 4% spendable income from it. Income needs lengthen the time the capital is exposed to the economy.
  3. Understand the idea of real return after costs and taxes. Yield matters but not all yield is taxed the same way. Capital gains and dividends are more attractive than interest.
  4. Know that not every stock behaves as every other stock. If the market fell 30% this week, at the end of the week some stocks would be up. Just the same, if the market is up 30% some stocks will be down. Think that through a little because the market indexes don’t make a lot of sense as an overall picture of the world. For example, the S&P 500 is composed of the 500 largest stocks. It is a weighted index so the biggest company is a more significant share of the total than is the smallest. At the end of August 2021, the top five companies, Apple, Microsoft, Amazon, Facebook, and Google, comprise 22.9% of the index. The last five account for 0.06%.

You don’t get the diversity in an index fund that you might think you do. Again, though the long term cures.

What if your long term is not very long.

Suppose you are 80, how should you invest? The old rule is 100 minus age so 20% in the market. The rest in “safe” securities. If you follow that rules you are ignoring reality.

You must ask a question. What’s my context? Suppose you just sold your home and moved into a retirement facility. You have Your previous portfolio plus about $900,000. Your monthly costs will be higher but taking out all the cost of home ownership, likely not all that much.

You examine your budget and find that pensions, government programs and 2% on what was there before ($500,000) covers your cost of living. Does it make sense to put $280,000 in the market and $1,120,000 in bonds? Probably not because most of the $1,120,000 is not money you will ever use in your lifetime.

For optimal estate planning, it should be in the market and relate to the age of your eventual heirs. You are merely the owner in the interim and you might want to reconsider that aspect too. Suppose you invested $1,000,000 of it at market returns of 7% after taxes and expenses becoming 4% after inflation? In ten years there would be purchasing power of $1.5 million. If you buy government bonds at 1.75% pretax you could expect real returns of about -2%. So 10 year investment returns purchasing power of $800,000.

Being “safe” cost you half your money. How good is that?

The bits to take away

Old rules of thumb are no longer relevant because the economic context is different.

You must think longer term to understand why the stock market makes sense.

Stock investments should relate to the parameters of those who will eventually own the money.

Planning is necessary to understand how much of your wealth will not be consumed in your lifetime.


Help me please. If you have found this useful, please subscribe and forward it to others.


I build strategy and fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email to don@moneyfyi.com

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