As I’ve shared in my past writing, I’m really captivated by the concept of time, especially as it relates to our financial decision making.
More recently, I’ve been considering the concept of “time preference” and it’s impact on both retirement planning as well as the rest of our lives.
See more below 👇
And thanks, as always, for reading.
Time Preference & Balance
Time preference is just a fancy way of talking about your focus on “now” versus your focus on the future.
High time preference would indicate you’re focused primarily on the present or immediate future.
Low time preference conversely means you’re more focused on the future or the long-term.
As you might imagine, this idea of time preference has economic significance.
And no where is that more evident than in your retirement and financial planning decisions.
For more on the concept of time preference, you might want to check this out:
In economics, time preference (or time discounting, delay discounting, temporal discounting, long-term orientation) is the current relative valuation placed on receiving a good or some cash at an earlier date compared with receiving it at a later date.
But as with most things in financial planning, time preference isn’t an “all or none” condition.
And that’s where things can get nuanced.
For example, if you have a child or grandchild graduating from high school this year, I would imagine your time preference for college planning and savings is pretty high.
However, if you’re 37 years old and you’re consistently saving for your retirement in 20-25 years, your time preference for retirement planning is pretty low.
We could easily identify dozens of other examples of both high and low time preference when it comes to your money decisions.
But just as I mentioned above, when you think holistically about your life and your financial planning, time preference isn’t absolute.
For example, in the examples above, which do you prioritize?
Planning and saving for college or planning and saving for your own retirement?
And remember, they’re not mutually exclusive.
Yet, I often meet people who have such a low time preference, that they don’t give themselves permission to enjoy their financial resources today.
And whether that’s a retiree who is fearful of spending too much today, or a middle-aged professional who saves and saves at the expense of enjoying their life along the way, many people do seem to approach time preference as binary.
As all or none.
But it’s really about balance.
It’s about being well prepared for an uncertain future while at the same time making the most of the one life you have each day along your life’s journey.
And while working to establish and maintain this balanced time preference, life can punch us all in the nose.
Whether that’s a global pandemic, job loss, death of a loved one, or all of the above, it’s easy to imagine how your best laid plans (financial and otherwise) can be thrown off track.
Ultimately, we all have to take care of ourselves today if we want to be around to enjoy the future.
And whether that’s taking care of yourself financially, physically, or spiritually, just be sure you’re taking care of yourself and those who are important to you.
But while tomorrow isn’t promised, that doesn’t mean we should plan on it.
And exploring, establishing, and maintaining time preference balance that works best for your personal situation is something that I think is a great way to take care of yourself.
I believe there’s a lot more to this idea of time preference and its role in your financial and retirement planning.
But I’m curious to know what you think.
Hit reply and let me know.
Bonds Are Shock Absorbers
Virtually all of my clients have bonds in their portfolio.
I have bonds in my personal portfolio.
The only clients who don’t have a bond allocation in their portfolio are typically the children or grandchildren of clients who range in age from 1 to 30-something. They have enough time to offset the short-term ups and downs of the stock market.
Most of my clients, however, are retired or plan to retire soon.
And it’s an interesting time for bonds (aka fixed income).
After interest rates have fallen and stayed at historic lows for years now, we’ve recently seen interest rates start to increase a little bit.
And as you may know, as interest rates rise, bond prices decrease.
But why is that?
Well, let’s say 3 years ago, you purchased a bond that paid 1.5% interest.
And today, after interest rates have risen, you can purchase a similar bond but it pays 2% interest.
Clearly a bond that pays 1.5% interest isn’t as attractive - or worth as much - as a bond that pays 2% interest.
And the reverse is also true.
As interest rates fall, bond prices rise.
But the last few weeks, interest rates have risen a little.
And as a result, we’ve seen mortgage rates rise.
And bond prices fall.
So the natural question is, “Should we get out of bonds?”
And as you might have guessed, the answer is no.
We shouldn’t get out of bonds.
No one wants to see an investment they own go down in value, but that’s not the primary reason we own bonds in your portfolio.
The first and foremost reason we own bonds is to help offset the short-term risks associated with stocks.
And bonds - especially high quality, intermediate term bonds like the ones I use and recommend - have historically done the best job of offsetting short-term stock market risk.
In other words, think of bonds as “shock absorbers” for the stock market.
But that doesn’t mean bonds are risk-free.
I think this recent Humble Dollar article explains it pretty well:
IT’S BUYER BEWARE for bond fund investors. Three big risks have snuck up on today’s fund shareholders, which—taken together—mean higher volatility and lower returns. I discussed these pitfalls with Ben Johnson, director of global exchange-traded fund research at Morningstar, the Chicago investment research firm.
Bonds play an important role in a long-term, diversified portfolio.
So it’s not about whether I believe you should own bonds or not.
It’s about how much of your portfolio should be in bonds relative to stocks and what type of bonds you should own.
And I definitely have opinions on this important matter.
If it’s something you have question about or would like to discuss, please hit reply to this email and let me know what’s on your mind.
I’d like to wrap up this week’s letter with another contribution from Morgan Housel:
Rare and helpful: Low susceptibility to FOMO. But for a different reason than you might think. The urge to buy an investment because its price went up means you probably don’t know why the price has gone up. And if you don’t know why the price has gone up you’re more likely to bail when it goes down.
I encourage you to read the short article above and see if you notice the how the concept of time preference is related to more than one of five ideas that Housel writes about.
Until next Wednesday,
Why indie music? Please read the Postscript of Issue #2 for context.
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Russ Thornton | Atlanta, GA | Disclosures: https://bit.ly/3e5t5UJ