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Getting back to basics of finance

Between the rocky rollout of the Affordable Care Act and the government shutdown and debt ceiling crisis, it’s been a jittery season for finances.

There’s so much new information and so many decisions to be made with the facts in flux: sell or hold stocks? Change your health plan or stick with what you’ve got?

We live in a time when there are more avenues than ever for learning about what to do with your finances. The problem is simplifying all that information so you can make decisions. There are two resources worth sharing that can help.

One is a list that’s gone viral on the web.

It came out of a conversation between Washington Post contributor Harold Pollack and journalist Helaine Olen, who has written an exposé of the personal finance industry. Her book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry (Portfolio, 2012) has been called a “shocking” narrative of the misleading advice given by big-name money gurus. One reason many people dread managing their money is that the huge financial services industry promotes the impression that it’s harder than it is. That’s a crucial part of getting you to pay for their advice.

As Pollack wrote on his blog: “The financial industry’s most basic dilemma: The best advice fits on a 3-by-5 index card and is available for free at the library.”

A reader challenged him and Olen to produce the card. The following (edited just a bit) is the advice they came up with:

• Maximize your 401(k) or equivalent.

• Buy inexpensive, well-diversified mutual funds such as Vanguard target-date funds.

• Never buy or sell an individual security.

• Save 20 percent of your income.

• Pay your credit card balance in full every month.

• Maximize tax-advantaged savings vehicles like Roth, SEP and 529 accounts.

• Pay attention to fees. Avoid actively managed funds.

And that’s it.

Of course, the problem with acting on information like this is that it’s not necessarily complete and customized to your individual circumstance. Target-date funds don’t constitute a fully diversified portfolio for everyone; some prefer even cheaper index funds. Some people don’t earn enough to save 20 percent of their income while also paying off their credit cards.

If you’re looking to go a bit deeper, the smart choice is to internalize the principles behind such advice in order to make your own bets.

For that, there’s a new free resource available online at

Josh Rauh, a finance professor at the Stanford Graduate School of Business, is teaching a free and open video-based version of his graduate course on the finance of retirement and pensions. Some of the videos are available on YouTube and you can sign up for the eight-week class starting in January at the site

There are 10 lectures (45 minutes each) in the course, broken into manageable chunks of 3-8 minutes. By watching just one of them, I learned a couple of interesting principles behind the standard stock market advice.

One is risk and return. Very simple. The reason we invest in stocks is that they offer potential returns over inflation. But any investment that offers potential returns over inflation also has the potential for losses in equal measure. No risk, no return.

A second is reversion to the mean. This is the idea that, over time, stocks and many other assets return from high or low periods to something close to the moving average. That means if you are retiring into a down market — say, in 2009 — it would make sense to hold off cashing out your portfolio for a couple of years in the hopes of a recovery. Reversion to the mean is a widely held theory, but it’s only a theory. Japan’s history, says Rauh, may be a counterexample: the stock market, the Nikkei, peaked just shy of 40,000 in 1989, a generation ago, and is only slightly above 14,000 today.

I’ve been writing about personal finance for almost 10 years, and there is always more to learn, even if the basics are simple.

Note: In my column on the Affordable Care Act, I incorrectly stated that the fee for individuals who do not sign up for coverage in 2013 is $95 a year. It’s actually $95 per individual OR 1 percent of income, whichever is greater. Thanks to those who pointed out the error.

Contact Anya Kamenetz by email at


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