If you’re a long time reader (and thanks if you are), you might remember way back when I wrote a series of articles that I called the Great Debates. These articles looked at some areas of the personal financial arena where there isn’t widespread agreement on the best approach to money management, or at least, those areas where said disagreement is the most fervent and hence, the ‘Great Debates’.
It’s been a while since I’ve covered many of these issues, but they are no less divisive than they were when I first covered them. In addition, in the years since I’ve discussed these issues, I’ve read more personal finance information, grown in my opinions, and have generally changed. As a result, I thought it would be good to review some of my earlier commentary and see where my opinions now stand.
That’s the plan for this article; so, let’s consider some of those Great Debates again:
5 Great Debates (and My Past and Current Views)
Great Debate #1: Renting Vs. Owning – At some point, you’re going to need to consider your dwelling place. The two most common methods are renting and buying. There are other options (say, staying at a hotel for the rest of your life), but renting vs. buying is the big Great Debate.
My Previous Opinion – When I first covered this issue, I focused mainly on what you could do with the money you’d save by renting rather than buying. I covered several other factors, from how much time it takes you save the money for the down payment (which many people tend to ignore when they discuss the issue) to how much return you get from your invested money. There was one issue, though, that I didn’t stress enough:
My Current Opinion – The big, big, big issue is time: the amount of time you are staying at a given location is pretty much the issue when choosing between renting and buying. If you are staying for less than (at the very least) five years, rent. There’s really no other choice. If you are staying longer (particularly more than ten years), buying a home becomes increasingly appealing.
Some arguments can be made, and I made them in this past article, that using the money that would have gone towards the down payment and the mortgage payments could allow you to end up more wealthy than buying a home, but that requires a level of devotion to investing that most people simply lack. If you do have that ability to focus on investing to that level, though, you’ll be able to succeed regardless of whether you rent or buy a home. In that case, unless you absolutely don’t want to own a home, you’re likely better off buying (unless you’re not going to stay in one place very long, to go back to our first argument).
Great Debate #2: Emergency Funds vs. Paying Down Debt – There are many different things you can do with your money, from food to wild vacations, but personal finance blogs (this one included) tend to focus on the good things you can do, like paying down your debts or saving for emergencies. So, which should you do first? Well…
My Previous Opinion – I originally stressed setting aside only one month worth of money as an emergency fund, then paying down high interest debt, finishing off by both increasing the emergency fund and paying down lower interest debt at the same time. It’s not a bad plan, as I noted in the first article, but there are some issues it doesn’t really consider, which is why I’d currently recommend:
My Current Opinion – My biggest change is this set of advice: Save up a great deal more. Unless you are absolutely certain you won’t lose your job and/or you will get an excellent severance package, you need a sizable emergency fund. I understand that if you have a lot of debt, particularly debt that charges a lot of interest, you want to pay it down (trust me, I understand), but that are a sizable number of expenses that will not take credit cards, so you need available cash.
How much? I’d recommend at least three months (if you think your job is fairly secure) to six months (if your company is, say, starting to cut down jobs) to possibly even twelve months or more (should you be in a temp job that you know will be gone in only a few months). This is not to say that you shouldn’t keep up with your high interest debt (and perhaps even add a bit more to each payment), but having a healthy emergency fund will greatly reduce your debt, should you find yourself in, say, an emergency. Also, these suggestions should be adjusted for the type of expenses you have, and the willingness of your service providers to accept credit cards; if every utility you have (as well as your landlord/mortgage provider) is willing to take credit cards, putting all your available money toward paying down credit cards and using those as your emergency fund is a pretty good idea.
Great Debate #3: Diversification – Many times, this isn’t even considered a great debate; diversification is always good, right? Just about every personal finance writer, particularly just about every blogger, says to diversify. But as I noted, there are some issues with diversifying, which makes it something to consider as you try to build a portfolio.
My Previous Opinion – For the bulk of your portfolio, diversify; that way, you aren’t hit particularly hard by bad stocks (or bonds, REITs, etc). When you have enough of a diversified portfolio, then you can try to identify the top performers and invest specifically in them, in hopes of boosting your results overall. That’s it in a nutshell.
My Current Opinion – Here’s one area where I haven’t changed much; my ideal portfolio is mostly diversified investments, typically mutual funds, with a few individual stocks (or other investments) to add some spice to your portfolio, if you are willing to do the research needed to pick the good ones. What type of mutual funds, you ask? Well, let’s get to that:
Great Debate #4: Actively Managed vs. Index Funds – There’s two major types of mutual funds, those where the investments are chosen by people (actively managed funds), and those where an index of all the stocks (or…oh, you get the idea) of a particular type are listed and all purchased (index funds). Which type of mutual funds is the best? Well…
My Previous Opinion – Index funds are the best. I did give actively managed funds a nod in that they could, at least in theory, perform better than an index fund, and recommended that you could add a few to your portfolio if you were willing to monitor them regularly and make sure that they were performing up to your expectations.
My Current Opinion – Here’s another area where my opinion hasn’t changed much; I still feel that index funds trump actively managed (and I’m hardly alone, as most PF bloggers don’t even consider actively managed funds as worth considering). If anything, nearly four years of life, including everything from going back to graduate school to having a new baby, have made me even more certain that index funds are the better option for most people, and that actively managed funds should be avoided by most investors, particularly anyone not willing to do regular research on their performance.
Great Debate #5: Traditional vs. Roth IRAs – This one is a major one in the personal finance arena, with numerous proponents on each side. (Everyone agrees that you should be investing for your retirement, and that either type of IRA is better than non-retirement accounts.) There’s so many good arguments each way that it’s also the only Great Debate I’ve already revisited. But the question remains: which type of retirement account is the best?
My Previous Opinion – My original opinion was that Roth accounts were probably best for those of us who aren’t retiring for a while and aren’t paying too much in taxes; the tax savings of a traditional account don’t help much when you’re barely paying anything in taxes. My second opinion on the matter was that traditional accounts were probably better for most working people, although a mix of the two with traditional accounts dominating was likely best of all.
My Current Opinion – I still think a mix is likely the best, although trying to determine the best mix depends on too much information from the future for us to figure out. Given the shifts in the tax code we saw earlier this year in the ‘not-so-great’ bargain, what is a good investment choice now right now might be horrible by the time I retire, and vice versa. Given that the traditional account gives me a tax break now (at least, until the tax code changes again), I’ll probably put more (nearly all, in fact) of my retirement money into a traditional type account, particularly when my income gets higher, although adding at least a thousand dollars or so to my Roth each year that I’m earning something will definitely help when it comes time to pull money out of the retirement accounts.