If you missed the first part of our Q&A with Peter Lazaroff go check it out first!

For while there, it seemed like we were getting a new personal finance book released every day. Now publishers are way more selective in who and what they publish. Hence, Peter Lazaroff’s new book: Making Money Simple: The Complete Guide to Getting Your Financial House in Order and Keeping It That Way Forever.

In Making Money Simple, Peter Lazaroff (@peterlazaroff) tries to do exactly that. He goes through the steps everyone needs to take to get their money lives on track and stay there. Peter is the co-CIO of Plancorp and BrightPlan. He also writes regularly on all things personal finance at his blog.

I had to the pleasure to ask Peter some questions about his new book. Below you can find my questions in bold. Peter’s (unedited) answers follow. Enjoy!

AR: You nearly laid out the inherent tension in investing. Most of us need equities to generate returns to help us achieve our goals, but equities are by their nature anxiety-inducing. How can we square the circle?

PL: Education and lots of hand holding. My job is to be your behavioral babysitter.

Stock market losses are the cost of higher expected returns. There are no shortcuts. The more you can mentally prepare people for losses, the less surprising and frightening the inevitable downturns will feel.

There hasn’t been a single client meeting in my tenure at Plancorp where I don’t talk about the normalcy of losses. When markets are down, our clients should think, “Peter told me this would happen and Plancorp has a plan in place for it.

However, some clients will always require ongoing support in order to stay the course. And that’s fine. It’s our job.

AR: Portfolio rebalancing is one of those things that advisors, and robot-advisors, are really good at doing and something advisors nearly universally recommend. Is this for returns reasons or risk reasons?

PL: Rebalancing is an important part of successful long-term investing. Everyone should systematically rebalance using a set of predetermined rules to maintain intentional risk exposures. There is also a behavioral benefit beyond that indirectly improves returns by giving investors something to do in light of market volatility. That indirectly enhances returns, but I’m still going to say rebalancing is more important for risk purposes.

That said, rebalancing is getting a little overrated. It is nowhere near as impactful on returns as human and digital advisors advertise. I also feel like human advisors probably rebalance more than is truly necessary. My research shows there isn’t an optimal rebalancing process – it’s totally dependent on the time period, market conditions, types of accounts, number of holdings, etc.

I’m fairly convinced that rebalancing once a year on January 1st is as good a solution as any. The problem is that isn’t acceptable to many advisors and clients. Much like using a pure indexing approach to investing, clients are apt to think they can rebalance on their own, but I’d suggest the average person lacks the emotional wherewithal to follow through. An advisor can earn a lifetime of fees in a bear market by sticking to a predetermined rebalancing plan.

Since most people won’t accept a single rebalance each year, my view is the best approach is to set tolerance bands. Lots of advisors already do this, but they aren’t as differentiated at the asset class or investment level as they should be. The bands are also usually too narrow, in my opinion. Let your winners keep winning for goodness sake.

AR: I loved the graphic about the importance of the savings rate vs. return on savings. The math is indisputable but the collective we spend so much more time arguing about adding a few basis points here or there to a portfolio. Why is that?

PL: For advisors, finding ways to improve returns is more interesting. There are also far more ways to approach improving returns. So many ways, in fact, that entire college and master’s programs revolve around learning the various approaches. Meanwhile, there is only one way to meaningfully increase your savings rate: spend less. It’s too simple to garner much debate.

From a client’s perspective, it’s less painful to seek a higher return portfolio than put forth the effort to save more. 

AR: In that same light you write a lot about the decisions that go into buying a house. For many people that is the biggest financial decision they make in their lives and has any number or ripple effects on their financial lives. What are a couple of key things to keep in mind when it comes to the housing decision?

PL: Housing isn’t an investment. A home is an extremely undiversified bet on a single structure in a single neighborhood in a single geographic region. A home is illiquid and indivisible (you can’t slice off a piece of your kitchen to buy milk). Worst of all, a home carries high transaction and carrying costs. Historically home prices have barely kept up with inflation – and only if you continue to pour money into it for upkeep and maintenance, not exactly something you want from an investment.

Housing is consumption. Looking at it this way will allow you to make better housing decisions. Something I painfully had to cut out of the book was research on the happiness derived from housing. The quick summary is you don’t derive much lasting happiness from your home. There is plenty of research, however, that says your commute time is correlated to your happiness. The implication is it makes sense to place a higher value on your home’s location than whether it has a remodeled kitchen or extra closet space.

AR: Term life insurance today is easier and cheaper to buy than ever before, but so many consumers still get sold all manner of life insurance that doesn’t fit their budget or needs. Is it as simple as telling people term life, period. Or is there a better formulation?

PL: Term life insurance is almost always the most appropriate type of coverage for individuals. Some exceptions include having a unique estate planning need (although there are still cheaper estate planning tactics than whole life insurance), special needs children, or a business situation that requires whole life insurance.

If you can afford whole life insurance, then you are better off buying term and investing the cost savings in a diversified portfolio. I’ve had a decent amount of pushback on whether people would do that or not, but if they have a good advisor, then they will do it.

AR: Thanks Peter for your time, and good luck with the book!

*Full disclosure: Peter was kind enough to send me a review copy of his book.

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