One of my favorite parts of the haggadah is the section about the four sons. The text reads: “Corresponding to four sons did the Torah speak; one who is wise, one who is evil, one who is simple and one who doesn’t know to ask.” This pivotal scene is rich with symbolism and a springboard for much insight.
One popular d’var Torah I’ve heard over the years is that each son represents a different point of a person’s life. Going from a baby who does not know how to ask to a simple, young son in elementary school. The evil son draws parallels to an angsty, rebellious teenager. Finally, the smart son represents a seemingly wiser and more experienced self. The moral is that at the seder we’re meant to draw in and speak to everybody around the table at their own personal level regardless of how young, old, ignorant, or experienced they may be.
I’ve been reflecting on this four sons d’var Torah and how it resembles the different stages of an investor’s journey. Understanding this progression can prove insightful for readers to recognize where they are in their own investment journey. Hopefully, it will also be helpful in attaining the ultimate level of investor success.
Stage 1: The investor who doesn’t know how to ask: The first stage of an investor’s journey is having no knowledge of how all this stuff works. The alphabet soup of 401(k), IRA, HSA, ETF, SMA, 529, and more that represents the investment industry leaves newbie investors understandably confused.
Unfortunately, lacking knowledge and expertise makes rookie investors susceptible to unscrupulous salespeople looking to make a quick buck at their expense. This is when investors typically get suckered into buying permanent life insurance that they don’t need, annuities that are not suitable for their situation, and high cost and tax inefficient investment products.
It’s not necessary for investors to start at “Stage 1,” but this is a natural first step for many investors.
Stage 2: The investor who is “wise”: After several years, some investors become more educated about personal finance and the markets. They understand the importance of saving for retirement in their 401(k), that they shouldn’t have too much cash sitting in the bank uninvested, and even how to place trades online. In some situations, investors become enthused with personal finance and begin reading blogs, discussing investment tips with friends, and start taking advice from their broke brother-in-law who always has an exciting “opportunity” available to him.
The problem at this stage is when investors think they know it all. Sadly, there is no combination that is more dangerous to your nest egg than overconfidence mixed with a lack of experience. This leads to the following devastating pitfalls: 1) Day trading 2) Market timing 3) Misunderstanding of risk 4) Misinterpreting performance metrics 5) Inability to discern sensible financial advice from quacks who hold themselves out as experts and 6) Trusting the wrong people.
The only saving grace of “Stage 2” is that for many investors it takes place earlier in their career. If it must happen, then it’s best to blow your portfolio up when you don’t have much money and still have earning potential through a long career. However, if you become “wise” ten years before retirement, this can derail your ability to ever retire.
Stage 3: The investor who is angry: Most people are not necessarily evil, they are just misinformed or frustrated by their struggles. This brings us to the angry investor who realized that despite feeling like they had solved the investment puzzle, they just made a mess of their finances.
The best approach is to have “Stage 3” last as short as possible. Recognize your mistakes, cut your losses, chalk up the first years of your investment journey as a learning experience, and move on with life.
Stage 4: The investor who is simple: The aspirational stage for investors is simplicity. This may sound counterintuitive, especially for folks who have developed a meaningful level of financial and professional success. After all, active management, regular modifications, and a threshold level of complexity is how you maintain and grow wealth, right? Wrong! To quote the famous economist and Nobel Laureate, Eugene Fama: “Your money is like a bar of soap – the more you handle it, the less you’ll have.”
The building blocks for successful investment management are simple and can be summed up in a few bullet points:
- Low cost
- Tax efficiency
- Boring > Exciting
- Don’t patshke
- Stay the course
That is all of investing in a nutshell. It applies equally to all levels of wealth, whether you’re just getting by or a multi-billionaire. Sure, many folks will need help implementing the above process due to a lack of experience, time, or desire. That’s fine and where a financial advisor who is a fiduciary comes into the mix. However, every facet of this process should be simple enough that your elementary school child can understand it. If it’s overly complex, then you are moving in the wrong direction. To quote the ultimate chacham and polymath, Leonardo Da Vinci: “Simplicity is the ultimate sophistication.”
May the theme of the four sons inspire inclusion, patience, as well as investment success.
Wishing all Jewish Press readers, a Chag Kasher V’sameyach!
Readers are encouraged to ask their personal financial questions, which may be quoted from and addressed in a future column, by emailing Jonathan@shenkmanwealth.com.