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 getthrough the turmoil.
A couple of years ago, University of Chicago social scientist Harold Pollack fita complete guide to financial planning on this four-inch-by-six-inchpieceof cardstock, which weshared 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.
[Read more:Everything you need to know to deal with the stock market collapse is on this index card]
But if you've followed the adviceon the card and invested in diversified index funds with minimal fees with anappropriate level of risk for your age, you can confidentlyhold onto your investments throughdays like these, without worrying aboutwhether you should buy or sell.
The card provedenormously popular, and Pollack and journalist Helaine Olen are coming out with a book based on it in January -- "which is sortof funny," Pollack saidin 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 householdinvest instock in any particular company. The person selling the stock probably knows more about the company than your average retail investor, sothe 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 anymutual 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 fundsholda broad range of securitiesof 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.
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The card instructs investors to buy target-datefunds -- fundsthatare designed to be bought and held until a particulardate, sometimes decades inthe future. These funds help investors plan for retirement or for sending a child to college, and they'reinvested in a largenumber of stocks and bondswith the right amount of riskfor 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, andmany investorsdefeat the purpose of atarget fund by buying other assets alongside the target fund, which defeats the purpose of the fund byadding in otherrisks.
Pollack is alsomaking 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 alsohas this: "Save 20 percent of your money." That'sa good goal, Pollack says, but it simply isn't realistic for many families.
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The final two points on the card are political.The Obamaadministration hasrecently proposedrequiringmorebrokers to adhere to the fiduciary standard, which means that legally, theymust act in your best interest. The financial industry is opposed to the plan -- they argue that implementing it would make gettingfinancial advice too expensive.Yet Pollack says it'sworth 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 careof your own finances. You should also give your support to programs such as Social Security, Medicaid, andfood stampsto help other people get by as well.
Lots of people have told Pollackheshouldn'tuse upany ofthose precious 24 square inches with political opinions, but he's not taking that lineoff the card.
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When Pollack'smother in law died, heand his wifehad to care forhis intellectually disabled brother in law, which would have been financially impossibleif his wife's brotherhadn'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 investorsfindthemselves insituations where theyare relying on checks from the government to get by.If Pollackdidn't acknowledge as much on his card, hewouldn't be giving honest advice.
