An Unprocessed Lifestyle
Simplify, simplify–Henry David Thoreau
The chef Alice Waters promotes an elegant cooking philosophy in her book Chez Panisse Vegetables: “Good food depends almost entirely on good ingredients…Never cook slavishly, rigidly following a recipe and thoughtlessly adhering to measurements it gives.” She really has been successful following this philosophy. As one story goes, in one potluck gathering of chefs, Waters’ wowed guests with her contribution—a salad made from boxes of fresh, hand-picked greens. The philosophy really appeals to me: focus on the raw ingredients and techniques while cutting out the harmful additives and processing.
I think the same idea can be applied to personal finance. Good finances almost entirely depend on basic financial understanding (the “ingredients”) and ways to apply your knowledge (the “cooking techniques”). Learn ways to improve your finances (”the recipes”) but avoid rigidly following them–always make decisions based on your preferences. Just as food additives and processing damage your physical health, financial advisors package investments to you that are harmful to your financial health.
Consider the Fidelity Freedom funds. The funds are easy-to-understand: you invest in the Freedom Fund that is labeled with a number, say “2040” or “2050,” that matches your retirement year. The funds are managed to meet your likely investment goals; a the Freedom 2040 Fund is going to have aggressive investments today in 2007, but in thirty years, it will have more conservative investments because you will be close to retirement. While the funds sound great, they carry relatively high management fees (about 8 times higher than an index fund) and, most problematic, they aren’t actually very well diversified! You can most likely do better by buying a few index funds and creating a balanced asset allocation. More about how to do this in a future post.
So how do I follow an unprocessed financial lifestyle? My overall goal is to learn as much as possible in big financial decisions and invest in easy to understand “unprocessed” choices, like index funds. I recognize this is a difficult goal; after all, even though I like to cook every meal and have the best ingredients, practical constraints like not having time to shop or cook get in the way. So yeah, it is necessary to buy ready-made food occasionally, but even then, I pick the least processed of the available choices. Similarly, learning about all financial issues can be daunting, so it is okay in the short run to keep money in something like a Freedom Funds instead of doing nothing at all. But stay hungry for unprocessed investments, and you can help your long term financial health tremendously.
