Personal finance is an exercise in mistake management more than the pursuit of perfection. Indeed, the best financial plans are those written in pencil, where numerous erasures are visible. They are novels that remain forever in draft form, in which the author continues to build on the narrative, charting out a series of compelling contingencies and Plan B’s.
But these divergences from Plan A, the unfinished story, the erasures and errors, all add to the texture of the plan more than they detract. The whole amounts to a patchwork of art with more character and visual appeal, not unlike the 500-year-old Japanese practice of kintsugi.
We'll look at four principles from this ancient art that inform our financial planning before guest market columnist, Brad Kaufman, updates us on a divergent week in the markets and reminds us of the #1 determinant of portfolio returns.
The translation of kintsugi is “golden joinery,” an art form in which broken pottery is fused back together by precious metals, like gold, platinum, or silver. This technique isn’t a mere exercise in scarcity or frugality; it is a philosophy from which we can draw direction and inspiration for more effective—and more enjoyable—financial planning.
Here are four principles of kintsugi that can instruct our financial planning:
That which is broken can be mended. There are fatal flaws in financial plans, but not in financial planning. The most common breakage in financial planning is often overspending. Yet overspending one month (year or decade)—or in one category—can be supplemented by another. The optimal mending agent is margin. Spending less than you earn is a good start, but an even better habit is funding the unexpected. In addition to backfilling overspending, simple savings can fuel spontaneity.
Flaws can be features. The loss of a job sparks an even more rewarding career. An investment gamble gone wrong inspires a more disciplined approach. Being forced to move to a lower-cost-of-living area introduces you to a new community. Bankruptcy fuels a passion for financial fluency.
There is “beauty in the incomplete.”Kintsugi draws from the Japanese philosophy of wabi-sabi— “wabi, which roughly means ‘the elegant beauty of humble simplicity,’ and sabi, which means ‘the passing of time and subsequent deterioration.’” And our financial planning never reaches a point of completion. Some mistake retirement for the financial finish line, but those fortunate to reach that milestone inevitably realize it is more a moment of commencement than finality. (And thank goodness!) Many, if not most, will see a depreciation in their assets in their final days, as a lifetime of appreciation is spent in lieu of earned income. And even beyond our time on this earth, the best financial planning impacts future generations through purposeful estate planning and philanthropy.
Lastly, it must be acknowledged that the process takes time.“The broken pieces’ gilded restoration usually takes up to three months, as the fragments are carefully glued together with the sap of an indigenous Japanese tree, left to dry for a few weeks and then adorned with gold running along its cracks.” The one theme that is likely common among the host of intentions activated in your financial planning is that they will take time to materialize. Thankfully, we’ve learnedthat we owe much of the enjoyment we derive from the benchmark moments in our lives to their anticipation.
It is important to note, though, that neither kintsugi nor good financial planning is formless. A mold is created, an intention articulated, an objective toward which we strive. Without intentions, there is no plan, and we end up wherever circumstances dictate. Without objectives, we are merely the means in someone else’s planning.
Financial planning, like kintsugi, doesn’t encourage aimlessness or glorify failure. Instead, it frees us from the momentary paralysis of missteps, invites us to learn from our mistakes, teaches us how to put the pieces back together, and then allows us to enjoy our ever-improving creation, bonded and adorned by our lessons learned.
Studies have shown that a portfolio’s asset allocation is the largest determinant of returns. It may seem like common sense, but asset allocation typically serves as the cornerstone of an investment strategy. It determines the level of risk you are willing to accept and the potential returns you aim to achieve. This strategic positioning can be particularly important for long-term investors who must weather market volatility in order to compound capital.
We cannot overstate the role of asset allocation in long-term investing. Over time, the performance of various asset classes can diverge significantly, making it essential to have a mix that reflects the investment horizons and financial goals investors identify. For instance, younger investors with a longer time frame may allocate a larger portion of their portfolio to stocks, while those nearing retirement may shift towards bonds. This dynamic approach to asset allocation helps investors stay aligned with their changing needs and market conditions.
Ultimately, we consider asset allocation as a dynamic process requiring regular review and adjustment. Periodically reviewing and rebalancing your portfolio, can help your investments remain in line with your risk tolerance and objectives. This disciplined approach to asset allocation can be key to achieving long-term financial success and peace of mind.
The Message from Our Indicators
As we review the data from this week's indicators, the recent bout of market volatility has not derailed positive earnings expectations. It remains early in the quarterly earnings season, but the bulk of the albeit small number of announcements has been for positive EPS surprises as well as positive future guidance. Things can change, but if the blended year-over-year growth rate meets current expectations, it would be the highest growth rate reported since Q1 2022.
Regarding valuation, the forward 12-month price-to-earnings (P/E) ratio remains above the 5-year and 10-year averages, at 21.4. High valuations increase market risk, but we would note that much of the apparent overvaluation is concentrated in large cap tech. The median P/E ratio of the S&P 500 is in line with its historical average of around 15.0. With valuation spreads wide, diversification becomes even more of a focus, which is why, despite the increased volatility, we welcome the increased market breadth of the last few days.
The macroeconomic landscape offers us a mixed but cautiously optimistic outlook. Inflation reports indicate a potential easing of price pressures, which could pave the way for interest rate cuts in the near future. July’s FOMC meeting may allow Chairman Powell to prime the markets for upcoming rate cuts. If inflation continues to trend lower and the labor market remains in a controlled softening, we anticipate that the elusive economic soft landing may be on the table.
I hope your weekend has a meaningful allocation to rest and relaxation!
Tim
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Oh, and BTW, The information in this article is for educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. That should really come from your financial advisor. Also, my opinions may--or may not--be shared by my employer.
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