Personal finance is always personal. It’s in the name. Yet many people forget about this. They want quick fixes by trying to use pre set formulas. Yes these can act as guidelines. But there is no substitute for taking into account ones needs and circumstances.
Take asset allocation for instance. We all know the rules. Have X amount in stocks. Have X amount in bonds. Have X amount in commodities.
It’s strange that people follow these rules so rigidly and don’t take into account their own personal situations. The only individualistic factor I would say most people take into account is age – the proportion invested in bonds goes higher the more we age, but not much else is taken into account.
But we need to factor in much more than our age when it comes to asset allocation.
I am reminded of a chat I once had with my neighbour who is a civil servant. He told me that he doesn’t have an allocation to bonds as part of his portfolio. He is 100% in equities and always fully invested.
Being the fresh faced kid I was out of university, I was startled. This man was going against conventional widows. He was going against everything I had been taught in my finance classes.
No bonds I exclaimed. I was about to hit him with everything I learnt about asset allocation during the many finance classes I took when he cooly said “ I am bonds ”. Brilliant.
He went on to explain that being a civil servant, he never expects to get sacked to he will always have a steady stream of cash flow. Furthermore he contributes to the gold plated civil service pension scheme which is backed by the full taxing power of the UK government so not much of a blow up risk there.
Yes, he was indeed bonds.
There is in fact a book which deals with this topic called “Are You a Stock or a Bond?: Create Your Own Pension Plan for a Secure Financial Future”.
The book explains that certain professions are like bonds – there is little risk of job losses, the pay received is steady and almost fixed with small incremental increases based upon inflation, and projection can be made as to how many years one has remaining.
Other professions, like an small business owner, are stocks because the earnings fluctuate wildly from year-to-year, sometimes bringing great riches and sometimes ruin.
Are You A Bond or Are You A Stock?
The key takeaway from the book was that those who have “bond professions” should invest most of their money in stocks because they could take advantage of collapsing markets and those who have “stock professions” should put most of their money in bonds and fixed income investments because when things were going south, they would need access to their cash.
So are you a stock or a bond?