Timeless Lessons: 5 Pearls of Financial Wisdom from the Past

January 7, 2016
SHIRLEY MUELLER, MD

Many of the principles of sound finance don't change over time. In this column, we look at five earlier articles that still have a lot to say about today's economic situation.

Even though previous columns are comprised of what is now old information, they can still be relevant. This is the case for the five articles I’m sharing below. In each instance, the subject is in bold, then the concept, and finally the link to the column in which the information originally appeared. With a volatile market as we have now, numbers 1, 2 and 4 are especially key.

1. The Importance of Financial Choices

Investing is not only about constructing a portfolio to achieve the best return, it is also about living with the consequences of the choices. Not having money when needed is the unfortunate outcome of an overly extended portfolio (meaning too risky without enough stability provided by cash or short term bonds, etc.).

An Ivy League Investment Strategy Strikes Out

2. The Case for Dividend Stocks in Uncertain Times

With a market fall the dividend probably won’t decrease as much as the stock price. Between 2007 and 2009, the S&P price per share fell by more than 50%, but the dividend yield diminished much less — only 23%. In the Great Depression, price per share fell by 90% but the dividends were shaved by only 50%.

Looking for Safe Return: Dueling Strategies

3. Can Financial Predictions Help You?

Joseph Davis, PhD, Roger Aliaga-Díaz, PhD, and Charles J. Thomas, CFA, from Vanguard, analyzed the predictive value of market metrics for US stock returns since 1926. Their paper — “Forecasting Stock Values: What signals matter and what do they say now?” — suggests that the usual criteria that managers and investors use when they make stock adjustments are of low or no predictive importance. In other words, paying attention to predictions by pundits is a waste of time.

Can Financial Predictions Help You?

4. Risky Assets in a Retirement Account

Shareholders don’t have a choice about what to do with their retirement money. If they saved enough, they can’t afford to lose it by buying risky assets.

Looking for Safe Return: Dueling Strategies

5. Annuities

Annuities are like butter. They seem tasty, but can be hard on the participant’s physical or financial health. For example, high upfront loads and fees can diminish annuity profit. In addition, whether the money is returned at all depends on the solvency of the company that guarantees the annuity. Lastly, annuity income is taxed at the highest tax rate, not the more favorable 15% for capital gains that is currently assessed.

Disposable Income: What about Annuities?