The First Rule of Personal Finance and Investing

Confidence is preparation. Everything else is beyond your control.

~Richard Kline

The First Rule of Personal Finance and InvestingForgive me for the title of today’s article. I usually skip reading articles like this because they inevitably disappoint. The #1 Way to Make a Million Dollars before You’re 30. The Only Thing You Ever Need to Know about Investing. Really? Just one thing?

To be fair, I’m sure some of those articles actually offer some interesting insights. For the record, I’m not trying to elicit clicks by using a hyperbolic headline. Let me explain how I came to my idea of the first rule of personal finance and investing.

Family Day Thoughts

We are on the cusp of a holiday weekend here in Canada as Monday is Family Day. This particular holiday is relatively new, but it’s quickly becoming a favourite for me. There’s no huge meal to prepare or tons of visiting to be done. Expectations are modest, so there’s less chance of being disappointed. Most importantly, it’s a day to celebrate and spend time with family.

Having said that, an extra day off always makes me more pensive than usual – and that’s saying something! 😉 You can spend Family Day doing anything you like, and quality time with family is of course, priority one. But long weekends like this one where there are no visiting rounds to make or fireworks displays to attend are a great time to reflect on where you’ve been and where you’re going. I tend to use them to reset and put things into context – including our finances.

I’ve been thinking a lot about financial strategy lately because I’m considering getting back into investing in the coming year or two and I’m trying to sort out the approach I’m going to take. You’ll recall that I’ve been mostly out of the markets for a few years due partly to my overall concerns about systemic risk, but more so because we experienced some major uncertainties around our income and we needed to be more liquid for a while. For now, our income has stabilized at a (hopefully) sustainable level.

We will be completely debt free once we pay off our mortgage sometime in 2011. That has us thinking about what to do with the extra disposable income and how to invest it. As I think about all of the possibilities, I keep coming back to the same idea over and over again. (I first came across this concept years ago when I read the Mark Douglas classic Trading In The Zone.)

Anything Can Happen

The idea that keeps repeating in my head is this: Anything can happen. For me, that’s the first rule of personal finance and investing. Notice that I didn’t call it the best or only rule of personal finance and investing. I don’t believe they exist. I’ve named “anything can happen” as the first rule because it’s a great starting point for any financial discussion.

Of course the basic premise is that we can’t predict the future. Maybe that’s why it’s so hard for some of us to construct and stick to a financial plan. There are too many variables and they can change by the month, year and decade. Anything can happen, so why bother?

Let’s take a look at how the first rule of personal finance and investing can affect a couple of key aspects of your financial planning:


You can sit down and diligently document your spending and still not hit your budget numbers. Why? Because anything can happen. Maybe you burst through your grocery budget this month because there was a great sale on flour or orange juice and you stocked up big time. Maybe your son scraped the car while trying to get his bike out of the garage. Oops. That wasn’t in the budget. That doesn’t mean you’ve failed or that budgeting is useless.


Is now the right time to buy stocks? How about bonds, real estate, or commodities? If they’ve been falling for awhile, maybe it’s a good time to buy. Or they might just keep falling. If they’ve been rising for a few months or years, surely we’ll see a pullback soon. Or maybe not. Anything can happen.

What Can You Do about It?

I’m sure at least some of you are thinking “Great. Thanks 2 Cents. Now I know that the future is uncertain. Duh!” Although the “anything can happen” concept seems glaringly obvious, I’m amazed at how often I shoot myself in the foot by ignoring it. It’s so easy to assume that everything will proceed according to our assumptions. It’s amazing how often it doesn’t. I’ve gotten much better about watching for curve balls as I’ve aged, but there are still those times when I strike out because I just wasn’t ready for the pitch.

So what’s the antidote? Here are a couple of things I try to remember as I go about my business:

  • Keep an open mind and be prepared for anything. There are no sure things in money or in life.
  • Always make some contingency plans. What if I’m wrong?
  • Don’t get complacent or discouraged. Whether things are going very well or not, you can be sure that they will change eventually.
  • A good plan should be flexible, but not flimsy: firm enough to provide real structure and discipline, but nimble enough to adapt to new realities.

All of it comes down to a quote by Jon Bon Jovi that I’ve used before: “Map out your future, but do it in pencil.”

If you decide to use an hour or two of the holiday weekend to focus on improving your financial situation, I hope you’ll start with the first rule and work from there. Most of all, I hope you get a chance to spend some quality time with your family. That’s priceless.

Do you incorporate contingency plans into your financial decisions?

Written by Kim Petch

12 Responses to The First Rule of Personal Finance and Investing

  1. Since this place is called Balance Junkie, I propose that the second rule be — Some Things Are Far More Likely to Happen Than Others.

    It’s of course true that in a literal sense anything can happen. The problem with focusing too much on this rule is that we humans are all self-deceivers. When we start thinking that anything can happen, we use that as a rationalization of behavior that we would otherwise know to avoid.

    Have stocks ever provided a good long-term return starting from the sort of price levels that applied in the late 1990s.? No, it has never happened. But a lot of us persuaded ourselves that all the old rules might be flipped on their heads this time because, hey, no one has a crystal ball and you never really know, right?

    It’s literally true that anything can happen. But the safe bet is to accept that things are likely to play out at least somewhat as they always have in the past. When the “Anything Can Happen” rule comes to be interpreted as another way of saying “It’s All Going to Turn Out Different This Time!”, it becomes dangerous stuff.

    Anything can happen. But some things are far more likely to happen than others.


    • All of your points are well-taken Rob. It’s hard to cover every nuance of a concept like this in under 1000 words, but I really meant to imply that we need to look at probabilities too. It’s human nature to extrapolate current trends far into the future. We may have a stable job today, but that may not be the case in a year or two. I just wanted to point out the dangers of complacency and the prudence of contingency plans.

      Thanks for your input!

  2. Anything can happen. You’re exactly right there. Knowing that is one of the reasons I’m such a wimpy investor. I don’t think that’s a bad thing, but I try putting the highest odds of probability in my corner:
    Dollar cost average (or even bettter, “value” average) money every month into investments.
    Distribute eggs into as many baskets as possible
    Invest with as much conservatism as a responsible pension plan

    What I do won’t appeal to everyone. But I’ve invested through booms and crashes over the past 20 years, and it has served me well by being wimpy.

    What’s your plan Kim?

    • Well, I’ll probably be a wimpy investor too. I haven’t finalized our approach yet, but I’m probably going to start with ETFs from sectors that I just want to own like energy and financials. I would also like to own some good dividend-payers for the long term as well.

      It would have been a lot easier to do this in 2008 when lower risk opportunities were plentiful, but we couldn’t take the risk at the time. I still see plenty of reason for caution out there so I would be reluctant to commit much capital to the markets now even if we were in a position to do so. Still, I like your idea of “value averaging” and our time horizon is still long enough to allow for some margin of error on that level.

      I’ll write more about my thinking as I go along and I’m sure I’ll get lots of good advice from readers. I’m kind of nervous about investing again after having been out of it for so long. We’ll probably take it slow at first.

      Thanks for your insights Andrew! 🙂

      • Based on your mugshot Kim, I’d say you’re a young woman. If you aren’t, then take the compliment. At 40, I hope to have (should I choose to) 25 more years of working ahead of me. Relatively speaking (compared to what I should have in the year 2036) my assets are a pittance today. So I feel OK about them being cut in half over a relatively short term (15 years or so) so I can take advantage of cheaper market levels as I keep loading up on my indexes. But where the markets will go, I have no idea. All I know is that the odds are very very high that the markets will be significantly higher 25 years from today, than they are right now. I’m not smart enough to pick and choose which sectors I want my money in, but I know that if I buy broad market indexes and keep my head, I’ll probably beat (based on pure mathematical statistics) 90% of professional investors. It’s a weird game where the person who doesn’t try beats most of those who do.
        What do you think of the general philosophy?

        • Well I guess “young” depends on your perspective. I turned 41 a couple of weeks ago.

          It sounds like you’re talking about a passive investing strategy. Having read your stuff, I thought you were more of a balance sheet watcher. I have a love-hate relationship with the concept of passive investing that’s still evolving and too complex to describe here. How about I write about it tomorrow? Thanks for the idea! 🙂

    • Well, it’s easy to stroke one’s ego by following the herd, chasing the hottest investment, and appearing “cool” to one’s buddies. On the other hand, it takes real balls to say that “I don’t care about any of that stuff, and I’m not going to follow the herd but instead follow what makes the most sense.” I mean, going back in when everyone thinks that the sky is falling down? I think that takes some real strength!

  3. Hey Kim,

    I’ve always had most of my money in indexes, and about a month ago, I converted the whole thing to a passive portfolio. I sold my individual stocks to do so–just over $700,000 worth, and I added the proceeds to the indexes I already own. I’ve been investing for 21 years (and I’m frugal) so I’ve stashed away a bit. That said, as I mentioned before, it’s peanuts compared to what both of us will have when we’re older (we’re about the same age).

    It was fun picking individual stocks while it lasted. I did that for about 11 years. I very rarely sold what I bought, so I definitely wasn’t a trader. But even my buy and hold approach, when looking at academic evidence, would eventually have me falling short of what a rebalanced, passive portfolio would give me over my future investment lifetime. At least, overwhelming statistical odds point to that, long term. My bond allocation always equalled my age though–which boosted my profits a lot after things went haywire in 2002 and 2008/2009. I mechanically sold off portions of my bond index to buy equities because my bond portion was far-exceeding my age. It was more of a mechanical strategy than an intellectual one.

    I’ve never given a single thought to interest rates, or to the economy, or to the price of oil, the price of gold, and I’ve never tried guessing where a certain sector will go over the next year, five or ten years, and I probably never will. For me, that kind of thing isn’t much fun. But it’s pretty weird, in many ways. Investing passively allows you to beat just about everyone who strains their brains to guess and speculate market directions. I highly recommend a couch potato type of strategy when you do choose to dip back into the markets. Over your lifetime, I think you’ll beat your friends who trade. Maybe not over a year or five, or even ten. But over a lifetime, I think you will….and pretty significantly. What do you think?

    • I will likely allocate some of our portfolio to a slightly passive strategy, but it’s unlikely I would take a purely passive approach. I really like looking at the economy and sector trends, although I admit that you can get the picture right but the timing of the appropriate investments wrong. My concerns over the U.S. housing market allowed us to lose nothing during the 2008 crisis, but we got out a little too early. Still, I have a feeling that I might have panicked out near the bottom if we had stayed in. Some of this stuff is a matter of knowing your own strengths and weaknesses. I just don’t have the constitution for passive investing.

      I understand the reasoning behind your approach, and given the amount you already have saved, I have no doubt you’ll do fine with it. But I put a little more weight on secular cycles and I worry about the prospect of retiring at a time of high valuations or during a secular bear market.

      While I won’t be using a purely passive approach, I won’t be trading as actively as I did before our market exit. I will likely allocate a very small portion of our funds to a more active style and take a less active approach with the rest. I expect the details of our strategy to evolve over time, but right now it’s looking like we’ll use a hybrid model.

      Thanks for sharing your thoughts here! 🙂

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