6 Money Lessons from Paul Samuelson

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6 Money Lessons from Paul Samuelson

Damian Davila for LongLiveYourMoney.com

The first American to win the Nobel Memorial Prize in Economic Sciences and recipient of America’s top science honor, the National Medal of Science, Paul Samuelson had fundamental contributions to economic science, education, and policy for over 60 years. First published in 1948, his seminal textbook “Economics: An Introductory Analysis” has been translated into 20 languages and continues to influence generations of college students. 

While Samuelson shaped the policies of politicians, economist, and C-suite executives, he has plenty of teachings that are useful to the individual investor and average Joe. Here are the top six money lessons from Paul Samuelson.

1. "It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office".

This statement still holds true today and is applicable across many situations.  Whether you’re at a casino, a racetrack, or a financial adviser’s office, you have to understand that you’re making a bet and there is always going to be some risk involved. The higher the potential return, the higher the risk involved with the investment.

Even when putting your hard-earned money in far more conservative environments than a gambling house, remember that there is no such thing as a “sure thing”. This is why it’s important to follow two of the most important maxims in investing: (1) Don’t put all of your eggs in one basket and (2) Know what you own, and know why you own it.

2. “Perhaps there are really managers who can outperform the market consistently – logic would suggest that they exist. But they are remarkably well-hidden”.

Here’s another key takeaway that is backed up by current data.  Only 20% to 35% of investment funds that are actively managed are able to consistently beat the benchmark for their category. Still, plenty of holders of 401(k) plans are playing part-time trader with their retirement savings and trying to time market based on short-term events.

Talk with your financial adviser or retirement plan administrator, develop a strategy, and commit to that strategy. Ignore the noise from turn-rich-quick schemers.

3. “You shouldn’t spend much time on your investments. That will just tempt you to pull up your plants and see how the roots are doing, and that’s very bad for the roots. It’s also very bad for your sleep.”

The key reason behind this is cost. Whether you’re dealing with an investment or retirement account, there’ll always be fees and charges involved with transactions. The more you muddle with your investments through purchase, sale, and exchange of funds, the more likely you’re to trigger investment charges, such as front-end loads and back-end loads. (Learn more at 5 Ways to Minimize Your Investment Fees)

While it is a good idea to review the quarterly reports from your investments and perform an annual review, resist the temptation of nixing holdings due to events, such as the Brexit or the impeachment of Dilma Rouseff in Brazil. Keep in mind that the average annual return of the S&P 500 for the 1928-2015 is 11.41%, despite World War II, the 80’s double-digit inflation, the dot-com bubble, and the housing derivatives bubble. To reap the benefits of most equity investments, you have to hold them for a long period.

4. “Reasonable men are not reasonable when you’re in the bubbles which have characterized capitalism since the beginning of time”.

When individual investors react to short-term market news, they tend to overdo it. Their tendency to overreact to market news costs individual investors between 1.5% and 4.3% per year.

A better approach is to react to market news with an emotionless and predictable strategy, which has been shown to boost investment returns by 0.4% per year.  One way to do this is through rebalancing of your portfolio once every quarter or year. Here’s how it works: Let’s assume that at the beginning of the year you hold 80% in equities and 20% in bonds. If your portfolio allocations were to shift to 95%/5% at the end of the year, you would do trades to bring it back to your target 80%/20% allocation. Through automatic rebalancing, you force yourself to buy low and sell high, avoid exposure beyond your risk tolerance, and keep investment fees low.

5. "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."

Samuelson was never alone in believing that investing should be boring.

In his 2013 letter to Berkshire Hathaway shareholders, Warren Buffett indicated that his will laid out that 90% of the cash of his estate be put in a very-low cost S&P 500 index fund from Vanguard and the remaining 10% in short-term government bonds. He believes that the long-term results from such a portfolio will be superior to those attained by most investors.

Legendary investor Peter Lynch said it best, “Never invest in any idea you can’t illustrated with a crayon”. Holding a portfolio similar to the one laid out on Buffett’s will and rebalancing it once a year may look like a plain vanilla strategy, but its returns are very likely to be extraordinary.

6. “Forsake search for needles that are so very small in haystacks that are so very large”.

Last but least, stop looking for wealth in the worst of places. Believe it or not, 21% of Americans think that winning the lottery is the most practical way for them to fund their retirement. In January 2016, your chances of winning the Powerball jackpot were one in 292 million. You have better odds of getting attacked by a shark (1 in 3 million) than winning the big Powerball prize.

So, stop throwing away that money in lottery tickets and sock it away in your retirement account. Not only will you effectively you reduce your tax liability once you file your return, but also you’ll build a stronger nest egg.

What are other great money lessons from Paul Samuelson? Please share your tips by tweeting me at @DavilaDamian

The information contained is intended to be for informational purposes only and should not be relied upon for investment, accounting, legal or tax advice.

Damian Davila is a freelance writer living in sunny Honolulu, Hawaii. He writes about financial topics because he enjoys helping people save money.

Born in Ecuador, Damian has traveled extensively and held positions in Mexico, Germany, Italy and the United States. He has a MBA from the University of Hawaii and a Masters in Educational Technology from a joint program between the Tecnologico de Monterrey and the University of British of Columbia.

Find Damian online at Twitter, and LinkedIn.

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