This week has been a chaotic one on Wall Street and in stock markets from Shenzen to Amsterdam. For most investors, though, one little index card is all you need to get through the turmoil.
A couple of years ago, University of Chicago social scientist Harold Pollack fit a complete guide to financial planning on this four-inch-by-six-inch piece of cardstock, which we shared with readers. It's comprehensive and easy to understand, if not always easy to follow: saving money is difficult when you don't have much, and in a panic like Monday's sell-off, the temptation to deviate from the principles on the card can be strong.
But if you've followed the advice on the card and invested in diversified index funds with minimal fees with an appropriate level of risk for your age, you can confidently hold onto your investments through days like these, without worrying about whether you should buy or sell.
The card proved enormously popular, and Pollack and journalist Helaine Olen are coming out with a book based on it in January -- "which is sort of funny," Pollack said in an interview Wednesday. "The whole concept is the index card."
Still, there are a couple of points on the card that take a little explaining.
Pollack does not recommend that a typical household invest in stock in any particular company. The person selling the stock probably knows more about the company than your average retail investor, so the chances of getting a bad deal are high. That's especially the case at a time like this week, when prices are fluctuating wildly and predicting is difficult, even for those who really know the market.
Instead, Pollack says you should buy mutual funds, but not just any mutual funds. Some funds have a manager who monitors the stock market and buys and sells stocks -- the "actively managed funds" described on the card. Other funds hold a broad range of securities of a specific type, such as stocks and bonds. Even though these funds don't have someone keeping an eye on them all the time, they usually do just as well as the actively managed funds, and the fees are less expensive.
The card instructs investors to buy target-date funds -- funds that are designed to be bought and held until a particular date, sometimes decades in the future. These funds help investors plan for retirement or for sending a child to college, and they're invested in a large number of stocks and bonds with the right amount of risk for the amount of time they're supposed to be held. Funds with dates farther in the future can take on more risk, since there is more time to make up the losses from any crash.
Pollack says that the book won't include the recommendation to invest in target funds. Some of these funds have expensive fees, and many investors defeat the purpose of a target fund by buying other assets alongside the target fund, which defeats the purpose of the fund by adding in other risks.
Pollack is also making changes to the advice on the card when it comes to saving. According to the card, you should pay off your credit card balance in full every month and maximize any matched savings from your employer. The card also has this: "Save 20 percent of your money." That's a good goal, Pollack says, but it simply isn't realistic for many families.
The final two points on the card are political. The Obama administration has recently proposed requiring more brokers to adhere to the fiduciary standard, which means that legally, they must act in your best interest. The financial industry is opposed to the plan -- they argue that implementing it would make getting financial advice too expensive. Yet Pollack says it's worth paying the extra money for someone who will acknowledge a fiduciary duty to you.
And lastly, Pollack advises, "Promote social insurance programs to help people when things go wrong." In other words, he argues, it's not enough just to take care of your own finances. You should also give your support to programs such as Social Security, Medicaid, and food stamps to help other people get by as well.
Lots of people have told Pollack he shouldn't use up any of those precious 24 square inches with political opinions, but he's not taking that line off the card.
When Pollack's mother in law died, he and his wife had to care for his intellectually disabled brother in law, which would have been financially impossible if his wife's brother hadn't qualified as a survivor for Social Security and Medicare.
"Boy, we needed that money," Pollack said. "I have to pay that forward."
In other words, even the savviest investors find themselves in situations where they are relying on checks from the government to get by. If Pollack didn't acknowledge as much on his card, he wouldn't be giving honest advice.