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Ep 18A: What are the 5 Simple rules of Investing? - Alice Finn, Author-"Smart Women Love Money"

Updated: Jul 17, 2023




EPISODE SUMMARY


Hello, This is Sirisha, welcome to my podcast!


Alice Finn is on a mission to enable and empower women, to learn more about investments and enable their financial journey. In Part 1, join Alice as we talk about the psychology of money, reframing the discussion of women as investors and the 5 simple rules of investing.


Each podcast has a few takeaways and resources at the end. Check them out and leave me your feedback!!


Come, let's #paintlifetogether!


Follow me on Instagram @womencareerandlife, and don't forget to listen & subscribe to the podcast here!


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Below is a transcript of the episode, slightly modified for reading.



PODCAST TRANSCRIPT OVERVIEW


[00:50] -Meet Alice Finn [Jump to section]

[02:30] -Smart Women Love Money [Jump to section]

[04:10] - Choices in Life Money gives you... A Personal story [Jump to section]

[04:51] - Women as Investors... Reframing the discussion [Jump to section]

[06:32] - The Five simple rules of Investing [Jump to section]

[10:07] - Compounding...Grow Money exponentially [Jump to section]

[10:52] - You can't time or predict the Stock Market [Jump to section]

[13:04] - How to start your investing journey...Next steps [Jump to section]

[14:23] - Why are fees important... [Jump to section]

[15:37] - Food for thought. Episode takeaways [Jump to section]


PODCAST DETAILED TRANSCRIPT


[00:50] Meet Alice Finn


Sirisha: We are continuing our discussion on 'Let's talk about Money'. I'm really excited to have Alice Finn, who is a wealth advisor, wealth manager, and expert who's featured on CNBC and many other organizations.


Her book, Smart Women Love Money has been in the US news, among the top nine finance books she's been featured in Romper as one of the 23 books. It's number five on the list that Adult Women should read. Alice, thank you for being here.

I am really excited about your mission statement to enable and empower women, to learn more about investment and enable their financial journey. So thanks for being on the podcast.


Alice: I'm delighted to be here and thank you for doing what you're doing, which is a broader mission, and I'm happy to be part of the money.


Sirisha: One fun fact, you're a lawyer, originally by trade and you worked at NASA. So what brought you to what you're doing today?


Alice: I worked in the general counsel's office. It was a really exciting time that I spent there. But after that, I realized that my personality, I'm not really a lawyer, I'm much more of an entrepreneur and I'm definitely a numbers person. and so eventually I figured that out and totally switched careers about 25 years ago and I've never looked back. I love what I do, I am both a geek about investing and I like to wake up in the morning and say, what's going on in Asia? What's going on in Europe, that's interesting to me. I also really enjoyed the psychology of wealth and the psychology of money. It's really fascinating and it's funny how my life has all come together because as an undergraduate, I studied psychology. So, even though I'm a numbers person, that background comes in handy so much for what I do.


[02:30] Smart Women Love Money-Psychology of Women


Sirisha: When you talk about the psychology of money, I was reading your foreword and you talk about when the book title was suggested, Smart women love money. There's a connotation with love when you talk about money and women in the same sentence. So can you speak to it and why you chose to still have that title?


Alice: I have a very talented publisher in Judith Regan and we had a different title, I can't even remember it. That's how not memorable it would've been. She at the last minute said, okay, how about Smart women who love money?


And when she proposed it, it took me a second, I almost cringed. I was like that just didn't sound right and then I realized that there's a problem because if you say Smart men love money, that's like a neutral self-evident statement. It's not cringe-worthy in any way whereas if you say Smart women love money, it makes you think for a second and I thought what's the difference? Why is there a difference between those two? Why is it that Smart women who love money are making a statement as opposed to saying something obvious? So the more I thought about it, realized she was right. This was a great title for the book because we need to address that.


I think culturally women, some have perceived caring about money as being greedy. When you, love money, it's not loving the physical money or even the luxuries you can buy with it. Is what it will do for your life to give you opportunities and choices and what you can do also to help the other people in your life that you love.


So if you have resources, you can take care of yourself and you can take care of your family. You can pay for an education, you can pay for down payments on a home, start a business or start a nonprofit, it gives you choices and opportunities. That's a really powerful ability to have, especially later in life, when you might have ideas that you want to put to work.


[04:10] Choices in Life Money gives you... A Personal story


Alice: My son is a world-class speed climber, he runs up walls. He's going to go on and get a PhD in mechanical engineering but before that, he'd like to take a year or two and try and train for the Olympics. He said to me, he's really appreciative that I can help him take that gap year or two and that's something that I feel very lucky that I can help him do. If I weren't paying attention to my finances and getting my money invested that might not have been an opportunity that I could've given him.


Sirisha: The choices just don't extend to yourself, but to extend to your loved and dear ones and even to society at large in your community, and it's reframing the discussion, it's reframing what we consider our relationship with money.


[04:51] Women as Investors... Reframing the discussion


Alice: I also think a lot of it is having a different image in our mind about what it is to be an investor. Women have to be investors. If you have money in a 401k plan, or any retirement account, you are an investor.


I don't think women think of themselves as investors. So in my company, we're thinking of starting a campaign of something like 'I am an investor, I'm invested' because we want to change the image of what it looks like to be an investor. It's not just men with white hair because in the past studies have been done and people would be asked, what does an investor look like? And it wasn't you or me, it was an older man and so I think just even changing that image is really important.


Sirisha: The image that comes to mind, the wall street floor and people are raising their hands and yelling out all the numbers. That's probably some of the images that people have as well and they don't see themselves. Talking about framework or role models, how do you see a representation in the wide world and does it speak to you to your point it doesn't look necessarily like us all the time?


Alice: I actually end my book by saying I have this dream that we're going to have, rather than, The CNBC fast-paced, adrenaline-driven TV show, which I know makes people pay attention and stay glued to the TV. I have this idea that we could take 'The View'. I don't know if you've seen 'The View' an interesting discussion and overlay that with the discussion about money. But the good news is we wouldn't have to talk so much about money all the time, because once you get your money working for you it's over there. It's invested. It's working for you by definition. It's in the market and we can talk about other interesting things and still be investors. We don't need to be focused on every minute of what's going on in the market because the money you've invested will be working for you while you're doing other things you care about and want to spend time on.


[06:32] The Five simple rules of Investing


Sirisha: You talk about 'The Five Simple Rules of Investing' to make it manageable and much more easy. It's not something you have to dip your hands constantly into. So can you just walk over the five simple rules?


Alice: The first one is to invest in stocks for the long run. You get the best return for your money. If you invest it in stocks, as opposed to fixed income, which is bonds and cash and the book shows the charts that just showed that magic of getting your money, working for you. The compounding $1 invested, in 1926 grows to over $20,000 invested in US, small caps and over six or $7,000 invested in US largely over a period of time. So it just shows those remarkable returns. That's the first rule.


The second one, Asset allocation is key. Your most important decision isn't whether you buy Apple stock or Google stock or Amazon it's what categories are you invested in and in what percentages. So first at the high level, what per cent in stocks versus bonds, and then, cause I consider the bonds or the fixed income to start the safety balance of the portfolio.


So you should take your risk with stocks and then within stocks, what per cent in U S large company stocks, what per cent in US small company stocks were present in International. And within international there are developed and emerging markets or countries they're continuing to develop.

So you want to have all those categories and also within this category, you want to have growth stocks, which are companies that are fast growing and other stocks that are value stocks that are undervalued. We overweight, undervalued stocks, value stocks, cause in the long run, those do better


The third one is implemented with index funds. So, once you have your asset allocation, you want to put it to work in index funds. Index funds are, basically it's buying the whole market in every category I just mentioned. So you're not picking active managers to try and beat the market because that's actually a loser's game, doesn't work.


So keep the fees low in index funds and just buy the whole market in every category and we're lucky that we live in a time. That index funds have proliferated. You can buy them in the form of mutual funds and you can also buy them in the form of what's called exchange, traded funds ETFs. So there are many choices in all those categories and we're lucky about that.


The fourth rule is to rebalance regularly. What does that mean? At least once a year or when the market's moved a lot, you're going to look at what your target asset allocation was and you're going to rebalance back to that because in a year, like last year where stocks did so well up 20 something per cent, you're going to have more in stocks than you do. So you can take some money off the stock part of the portfolio and put it back into the fixed income to rebalance. And then similarly within stocks in the different categories, some things did better than others.


Like last year, US large company stocks did really well and emerging markets the countries that are developing didn't do as well. So you want to take some off the table of the U S large cap and put it back into things that didn't do. Which is emerging markets from last year and to me, that's the best way that I know how to sell high and buy low.


And this year, so far, it's worked because emerging markets have been one of the best-performing categories, whereas US large-cap stocks, especially growth stocks have actually done quite poorly this year. So this year it's a good example.


And then finally the fifth rule is keeping your fees low because believe it or not, first of all, people usually don't even know what they're paying. A lot of people have no idea what they're paying in fees, but if you're paying one or 2% more in fees than you should over time, you can lose half your net worth to fees and not even know it. So it's really important to know what the fees are and keep them low.


[10:07] Magic of compounding...Grow Money exponentially


Sirisha: When you talk about your five simple rules, one of the people I spoke to about their financial journey. She's in her mid-fifties. Now, she's been invested for about three decades and she talks about the first $10,000 that she put in.


It took her a few years to even get into the mindset and find a financial advisor. And that 10,000 with some contributions is reached half a million. So in 30 years, talking about just the market, not talking about other assets or other ways she's growing her money.


Alice: Exactly, I was going to say that is not an unusual example.


We show that over a period of time. The asset allocation part of the book. If you put $10,000 to work 40 years before you wanted to retire, believe it or not, 40 years later, it was worth like $2 million. Crazy.


[10:52] You can't time or predict the Stock Market


Sirisha: We know the right thing to buy low and sell high. But when we see the market coming down, our instinct takes over to try and flip it. So if you have a hands-off approach with indexing and then balancing it once a year then you can just manage the risk and not look at it every day. You're still an investor you're still managing your money. It's still growing for you, doing everything you wanted to do without you having to constantly think about it and be anxious about it, so you get the best of both worlds.


Alice: When people call me up and they say, 'Oh no, what's going to happen to the market or inflation so high and the Fed is going to raise interest rates. What should I do?' What I try and explain to them is what moves the market is surprises and by definition, you cannot predict a surprise. So we already know the inflation's high and the Fed is likely to raise interest rates. That's already been priced in.


So to try and move your money in and out of the market, based on that doesn't work and sometimes people will do it and they will be right once. I remember people coming to me when the financial crisis of 2008, and 2009, and they said, I was really smart, I took my money out before the bottom. But then they didn't get back in and the market's much, much higher than it was then and so you have to be right. Not just once but twice or over and over again in order to time the market and I've not seen anybody successfully do that over time. Maybe once, maybe twice, but not consistently.


Sirisha: The gains in the market when it dips like that in 2008 and even during COVID when it dipped in that 2020 timeframe, the gains can happen any day quickly.


So you can't figure out when it comes back because you dipped 50%, it's not 50% to go back to the whole, you need a hundred per cent growth to hit even your basic investment.


Alice: So if you've invested a hundred dollars and it goes down 50%, you're at 50 to get back to a hundred, has to go as you just set up by a hundred per cent, you have to double that 50.


The best thing to do is come up with an asset allocation that you can sleep with at night. So I always want to make sure my clients have an emergency fund and that they're not invested so much that they're worried about losing money. So over time, I get to know my clients and I make sure that they're sleeping at night.


They're not worried about the volatility, because if they are and we have to sell at the bottom, I feel like I haven't done my job.


[13:04] How to start your investing journey...Next steps


Sirisha: If I'm a new investor, technically most women are not new investors because they're only investing in 401k. But if I start to think of myself as an investor and I want to go into the market of what's happening in my 401k, to open a brokerage account and take over my financial journey and own it, what are the steps I would need to do to execute on the five rules


Alice: Probably most women already have some money in a 401k or an IRA or something. Once they have their emergency fund, talk about the cash that they have in a regular taxable account. I would think of everything that you're going to invest as one the combination of your retirement accounts and the cash you're going to put to work.


First, add up all that. And let's just come up with a round number, say it's a hundred thousand dollars total. Then you come up with your asset allocation, if someone's relatively young, maybe they want 80% going to be invested in the stock market.


20% is the safety ballast invested in fixed income, which is bonds and cash. Then you want to see, what percent has already been invested, assuming you have a hundred thousand, you want 80,000 invested and maybe in your retirement accounts, you've got 50, and you have 50,000 of cash in the bank account.


So that means you could invest 30, more to get to the 80% of the rest. And then within that that you're investing, you want to make sure you've got an asset allocation that's diverse. Our large cap, small cap, what per cent international and within that emerging market, everything we talked about.


[14:23] Why are fees important...


Sirisha: When I first moved jobs, it was a new country for me. I had very limited knowledge. I went to the bank where I had my bank accounts and asked them for advice. rolling over my 401k and IRAs. I rolled it into their suggested accounts, but a year or two later, when I started to learn more and talk to friends about it, I realized I had the 12 B account front loaded, back end loaded. There were just fees all over the place and I looked at it and said, why did they ever recommend that investment for me.


Can you talk about front-end and back-end and general fees in place, can you guide us through that discussion on how to make sure we do the right decisions?


Alice: That's a very good question. And as I said, the last rule of the five rules of investing is, to keep your fees low. And the only way to know whether they're low is to know what they are and so anytime you're working with anyone, ask them what, all the fees that you'll be paying.


And I'll just say, categorically, you should never pay a front-end load, a backend load, so never pay a load. So to the extent that you're invested in things that are actively managed and they have higher fees, that's a constant tax or constant negative return on your portfolio. So I would just make sure that what all the fees are and keep them low. and terms of keeping the fees low, invest in index funds.


[15:37] Food for thought. Episode takeaways


As we wrap up part 1 of our interview with Alice Finn, the Food for Thought, Episode Takeaways. I'm just going to do a quick recap of the five simple rules of investing.

Rule number one. Invest in the stock market

Rule number two. Asset allocation is key.

Rule number three, invest in index funds.

Rule number four, rebalance your portfolio regularly to minimize risk.

Rule number five, keep your fees low by investing in index funds.

I hope you enjoyed the episode and are able to implement some of these actions on your own portfolio. Please tune in to part 2 of this conversation with Alice Finn, as we talk about how to pick a financial advisor and some of the key areas. for you to grow in your financial journey.


Resources Mentioned:

  • Website | "Smart Women Love Money" by Alice Finn

Guest: Alice Finn

  • Website | Alice Finn

  • Email Address | alice@alicefinn.com

Host: Sirisha

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