Explaining personal finance can be pretty dull. That’s a problem, if you need to learn personal finance.
On a plane from St. Louis to Seattle, I decided to try and fix the problem. What if I could wrap some personal finance concepts inside of a quirky (funny?) short story? My goal here is to present some information, and then add another step in the story. So, when you get to the end, you’ve been reminded of finance concept- but you’ve received the information in a light-hearted way.
Anyway, that’s the goal here. The stories are written in chapter order, so that there is a logical flow for the reader. Enjoy!
Walmart is already out of ice melt?
How To Manage Personal Finances: New book. Get Sample Chapters here
Greg shook his head as he headed for the other entrance. An ice storm was forecasted for St. Louis starting that night, and Greg (being a former Boy Scout) needed ice melt for the driveway and sidewalks. If the amount of ice melt sold was any indication, people were taking the ice forecast seriously.
As Greg tossed a second bad of ice melt into the truck, his cell phone rang. “Well, I’ve got salt on the driveway, how ‘bout you?” Greg smiled as Tony chuckled on the other line. “I’m leaving Walmart now.” Greg replied. “They were out of ice melt at one entrance, so I walked 3 miles to the other entrance. Just how big is Walmart?”
Tony laughed. “I was there last week- I can get my taxes done, have an eye exam and buy a big screen TV…all within 50 feet.” He shifted in his chair. “So, I’m calling you back on that investment risk question”.
Ice was forming on tree branches as Greg drove home- it sparkled as the sun set. “Well, I guess I need to have an honest conversation about how much risk I’m willing to take. Since I don’t have a starting point, I thought I would talk with you. I just got home- lemme call you back.”
Greg took his dog Colette out for a walk- and he had to stay on the grass, so that Colette didn’t get salt in her paws. He called Tony back as he walked the dog. “Wow- there’s two pine tree branches that are laying on top of a power line. The ice is weighing down the branches- I’ll walk down here later and see how it looks.” Greg turned right to go around the block.
“So, I know I’ve got a long time until retirement. I’m 50 and probably won’t retire until I’m 70. The marketing material told me to consider my investment timeline.”
Tony thought for a minute. “OK, you’re got 20 years, which means that you have some time to recover, if you have some investment losses- or if your investment performance isn’t as good as you expect. Let’s call it ‘recovery time’. If you have a 3 to 4 year run of poor performance, you have some time to recover- but not a lot of time. That’s a factor when you assess your risk tolerance.”
Greg stopped to wipe the snow off Colette’s paws. “So I have some time…but I can’t afford to have bigger losses the closer I get to retirement, because I don’t have time to make that money back- it get it. I got that chart that you sent me with the Standard & Poor’s returns. How does that tie into the conversation?”
“The Standard & Poor’s 500 is an index of 500 of the largest stocks, in terms of market capitalization– which means that total dollar amount of stock trading. What I mean is that the index is a nice way to consider how the overall market- a market with thousands of stocks- is performing.” Tony opened the outside fridge.
“I better get more beer before the weather gets bad- glad I looked!” Tony walked over to his laptop to look at the chart. “The second link I sent you explained that the S&P index has averaged a 10% annual return between 1928 and 2014. But there’s been a lot of fluctuation along the way. Go back to the first link. In ’97 and ’98, the total return on the index was around 30% each year, but in 2008 the index lost 37%.”
Tony glanced out of the window. “Wow- with all the old trees in the neighborhood, the ice looks pretty cool at sunset.” He closed his laptop. “So the question for an investor is: how much fluctuation was you willing to live with? Would you invest in the S&P 500 index and be comfortable with some big changes in investment performance?”
“Give it some thought- I’m gonna warm up the car.” Tony walked toward the garage door. “I’ll say it this way: if your investments declined 20% in one year, is that something you could live with? Be safe- call ya later.”
As always, this information is for educational purposes only. Consult a CPA or a financial advisor for more information.
Action Steps To Consider:
Consider your own level of risk tolerance.
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(website and blog) http://www.accountingaccidentally.com/
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Image: Ice Tree Martin Cathrae (CC By SA 2.0)