Four Rules for Work Life and Financial Life

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With the “rules for life” idea currently popular, here are my thoughts on work and finance.

Don’t confuse your workplace with your family. When you have little left to learn on your job, it is time to move on. Take risks with high plausible upside. Avoid risks with high plausible downside. Save and invest to get rich slowly.

Don’t confuse your workplace with your family.

People bring all sorts of family drama into organizations. Your supervisors can seem like parents. The people you supervise can seem like your children. Your colleagues can seem like siblings, with all sorts of jealousies and rivalries involved.

But in fact you are better off seeing your work relationships as transactional. That is, you do things for other people, and in exchange they do things for you. The people that you transact with on the job are not perfect, and neither are you.

Try not to load any additional emotion onto those relationships. It is not deplorable that some of your “siblings” (co-workers) appear to get higher pay and better treatment than you do. It is not a tragedy that sometimes your “parents” (bosses) make poor choices. In fact, if the organization were run flawlessly, then it probably would not need you.

Organizational conflict and friction are inevitable. Some people are difficult to get along with. I call it corporate soap opera. It always seems gravely important when you are in the middle of it and then childishly trivial after you have moved on from it.

Try as hard as possible not to take things personally. In relating to others, think in terms of “professional” and “respect.” Treat others professionally and with respect. Show that you expect them to do likewise with you.

Above all, your employment relationship is not a marriage. You can stay interested in other opportunities without being unfaithful. You can walk away without going through a bitter divorce.

When you have little left to learn on a job, it is time to move on.

In my career, I never stayed in one position very long. Often, I took on a role that was newly created, or one which I could re-define by changing how it was done. Once I learned how to be effective in a role, I trained a successor and looked for something else.

Everyone feels uncomfortable when they are just starting a job and have a lot to learn. But you should also feel uncomfortable when you reach the point where you can do the job so well that there is not much need for learning. That is when you should think in terms of training a successor and finding something else.

Finding something else often involves changing organizations. Every organization has its own culture, and what you can learn is limited by that culture. Think of an organization as something like a college. After a few years, it is time to graduate and go elsewhere.

Of course, if you are rising within an organization, then each promotion introduces you to new people and new challenges. You are learning in that case. But if you have not been given a new challenging opportunity in more than a year, then in order to continue to grow and learn you may have to leave.

Take risks with high plausible upside. Avoid risks with high plausible downside.

In 1994, I quit a well-paying job to start a commercial web site. I thought that the upside was very high, and the down side was limited to lost salary and the cost of setting up the web site. I thought that learning about starting a business and learning about the Internet would make up for some of the losses. As it turned out, luck was with me, and the business evolved into something that could be sold profitably.

Recently, we were looking at the possibility of buying a new house. We found one that had some of the characteristics we were looking for. But in my opinion there was not much upside. Because moving to a different house can always bring unexpected problems, I took the view that this is not the sort of risk I wish to take.

Just to be clear, I think of a plausible upside as something that has at least a 5 or 10 percent chance. Buying a ticket in the state lottery has a high potential upside, but it is way below the threshold of plausibility. Real life offers you better lottery tickets, and you should bet on those.

An example of a real-life lottery ticket is striking up a conversation with a stranger. You can do this while waiting in line in a store or sitting next to someone on an airplane. It has plenty of upside and little downside. Make a habit of doing it and you will turn into a lucky person.

Save and invest to get rich slowly.

The difference between living within your means and spending beyond your means may be small in terms of percentages, but it adds up over a lifetime. If you save 10 percent of your income every year, then you will be able to retire early and well. Instead, if you spend all of your income, you will constantly suffer from financial stress.

For investing your savings, I will offer standard advice from economists who study finance.

A diversified portfolio is better than trying to find a “hot stock.” An index fund that invests in the S&P 500 is fairly standard. The expense ratio should be really low. Fidelity and Vanguard offer such funds. For even more diversification, you can put, say, one-fourth of your stock investments into an international index fund, such as Vanguard’s total international index. A form of U.S. savings bonds, called i-bonds, offers a safe, reasonable return. The safety comes from the fact that they are indexed for inflation. Take full advantage of employer-subsidized and tax-advantaged savings plans, such as 401(K) plans.

I personally try to time the stock market, in a limited sense. That is, when price/earnings ratios are historically low, as they were in 2009, I put relatively more of my assets into stocks and less than one fourth into safe assets, such as money-market funds or i-bonds. When price/earnings ratios are historically high, as they are today, I choose a more conservative mix, with more than half of my savings in safe assets.

This form of market timing is suggested by some financial research that I find plausible. But it is not a proven strategy. Robert Shiller, the financial economist whose research influences me, is very cautious about trying to apply it.

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