Ever notice how hard it is to say, “Okay Einstein…” without sounding sarcastic? So I’m no Einstein, but I am thinking about my own theory of relativity. Spoiler: don’t let the project of accumulation blur the enjoyment out of life.
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One school of thought about investing holds that ups and downs are the same as risk itself. A related belief: the role of a professional advisor is to minimize this volatility, to select investments and products and strategies that are more “stable” in the short term than traditional long-term investments, such as stocks.
We have a different view, one that says the ups and downs are an integral, inseparable part of seeking long-term investment returns. In striving to grow long-term money over the long term, we work diligently to communicate the attitudes and strategies of effective investing. (It’s why you’ll hear us repeat ad nauseum, “It goes up and down.”)
But don’t mistake us for pessimists. One of the attitudes of effective investing, we believe, is to embrace the idea that we get paid to endure volatility. Volatility is just the inevitable short-term wiggling, in our view. It’s not the same as risk if it’s just part of the ride.
There are plenty of quizzes out there to “measure” one’s aversion to risk. Many produce a “risk number.” But one of the realities of investing is that risk and reward are related. So the higher a person’s “risk number,” the greater their potential returns. The lower the number, the less wiggling—and the stymied potential returns. There is a trade-off.
We disagree with the notion that wiggling is a good measure of risk for long-term money, and it’s worth pointing out the consequences of this approach. Let’s do the math.
Over an extended period, the foregone returns of a less-wiggly portfolio are, in effect, a stability tax. A lump sum invested for 25 or 30 years might only grow to half as much as a more effective portfolio that embraces that longer time horizon.
For instance, imagine a person starting to invest for retirement at age 40: a monthly investment of $1,000 to reach their desired goals in an effective long-term portfolio would take $1,500 monthly in a less wiggly portfolio! All things being equal, less volatility would be nicer, maybe—but if this were you, would you take $500 every month from the rest of your budget to pay a stability tax?
Put this way, the cost of avoiding some uncomfortable volatility is actually quite a burden! Half your future wealth? It’s a lot to pay to smooth some bumps now.
Clients, that is why we work with you to determine if you can live with volatility on some fraction of your money. Instead of pandering to the fear of wiggling, it is more gratifying for us to strive to be effective long-term investors. We’re all about trying to grow the bucket, not giving you a smoother ride to a likely-poorer future.
To be clear, this isn’t for everyone, and it is not suitable for short-term goals. But when you would like to talk more about avoiding the drag of stability on your long-term investing, please email us or call.
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Play the audio version of this post below:
Half our staff here at 228Main.com is under 40 years of age, and as you may realize, I’m… not 40.
And I plan to work to 92.
Suffice to say, my “retirement” plan won’t be the right model for everyone. But that doesn’t mean these younger staffers—and many clients their age—aren’t working on their own plans and planning.
A client’s age or generation matter to a certain extent in our line of work. What we’ve noticed, however, is that the most important part is how each person relates to their age.
Think about my goals again. Of course my age is a factor in my planning, but my intention to continue working changes things more. If I were only working for 2 more years, my strategy would require a totally different gear than my plan to earn an income for 20 more years!
Clients, I don’t mean to suggest you need to know your retirement date now—or even have an exact vision of your retirement lifestyle. In fact, what I want to suggest is that it’s okay if it feels like you’re saving for a fuzzy future self.
“But how do I know whether I’m track? I should’ve started years ago, right?” We’ve heard this before.
No guarantees, but if you’ve made it into a conversation where you’re asking someone you trust this question, you’re on your way. From here, it’s about working toward your goals. How your parents retired, how the plan goes in a chart in a pamphlet that gets stuffed into your hand… if you compare your plan to those examples, they can add more anxiety than applicability.
Reframe. Retirement planning is about your goals, your timeline, your lifestyle. No external marker.
Feeling behind? Arianna Huffington calls this sense of a ticking clock being in a “time famine,” a state where “your feeling is that it must be later than you think it is.” Feeling starved for time to do what you need to do is no foundation for a strong plan.
“Yeah but how will I…”
Ooh, good question! That’s where we come in, and we’d be honored to help you shape this vision. Reach out when you’re ready.
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“Wealth consists in caring less about what others think about you and more about using your money to control how you spend your time.” — Morgan Housel
We’re fond of the work of Morgan Housel, who strives to help folks change their relationship to money. In his definition of wealth, we notice two key ideas—ideas that could bring some clarity to our financial decisions.
Wealth Isn’t About Anyone But You
It takes only a moment to recognize the potential problems of using wealth to influence how others perceive us. The trappings of wealth can be had with borrowed money: a $10,000 watch for $200 monthly payments, a luxury car for a monthly lease payment. But the watch and the car are not proof of anything.
Ultimately, we do not control what others think. No amount of money gives us that power.
When we focus on meeting our own needs rather than some notion of what might impress others, we require less wealth to gain control and therefore focus. We may be able to retire earlier or work at a more rewarding endeavor on less money, should we choose… which leads us to the second key idea from Housel’s definition.
Time Is Money Is Time
The familiar phrase “time is money” comes to us by way of Benjamin Franklin, writing in colonial Philadelphia. Housel writes that wealth is about using your money to control how you spend your time. In short, he turns the idea upside down: money is time.
Carried to its logical conclusion, when we have enough wealth, we may retire and gain control over the time we formerly spent working. In the form of Social Security and pension benefits, investments and 401(k) balances, the money we’ve earned then buys us time. Money is time!
Housel adds a layer to our understanding of wealth, which magnifies the good it may do us.
When you are ready to talk about your time or money, email us or call. We’ll be ready to talk with you.
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The dramatic and unexpected events of 2020 have tested our adaptability and resourcefulness like no other. There are patterns in those who are navigating these times successfully.
1. Realize there are usually lessons in history to guide us; maintain perspective.
2. Avoid hasty decisions that could have negative long term consequences.
3. Look for the opportunity in the challenge, not vice versa.
By taking time to think about the context, understand our own situation, and get accurate information about whatever the new reality is, we usually can make better decisions.
In personal finance, tapping high interest credit cards to maintain spending in the face of income reductions may be necessary for some items. But any outlays that can be avoided, or are discretionary, should be deferred, not financed. The average credit card interest rate remains in double-digit territory, a huge drain.
In your investments, long term holdings should not be disrupted by short term considerations. When the situation changes in ways that everyone knows, the new circumstances are likely to be priced into the market already. So there may not be an edge in taking action. If you do not need the funds in hand for pressing purposes, you might leave them be.
The stress of the situation may be alleviated by working on things within your control. Practicing healthier habits with regard to exercise, nutrition, sleep, and alcohol can also reduce stress, while giving you a sense of conrol.
Finally, contact with other people is a necessity for social beings such as humans. It may be especially useful as you talk things out or need someone to bounce ideas off of. We would be happy to visit with you by phone or email, Zoom video or in person – about whatever is on your mind. Email us or call.
The old saying, “Can’t see the forest for the trees,” refers to the difficulty we humans have in maintaining perspective, of keeping the larger context in mind. Our current challenges bring us reminders of this.
Recently we were discussing the prospects for investing in a food processing company. Market disruptions have knocked the cost of $1 of annual earning power down to $10 – an earnings yield of 10%. (Another way to say it: a price-earnings ratio of 10.) If one can purchase durable earning power in an enduring industry at valuations like that, the holding might be owned a very long time.
(No guarantees – there are a lot of assumptions in that last paragraph.)
A colleague asked us whether we were concerned about the impact of processing plant shutdowns. After agreeing that any shutdowns would likely be limited to a matter of weeks, this seemed to be one of those problems of perspective.
For none of the past few decades have the plants been shut down for a virus. Apart from the next few weeks, it seems unlikely that virus-related shutdowns will be much of a factor in the decades ahead.
The forest is that we humans will still need to eat in the future, and there is probably money to be made by meeting that need. The trees are the virus and the shutdowns and the disruptions. One of our key roles is working to see the big picture and striving to act accordingly. We need to be able to see the forest in spite of the trees.
Interestingly, the challenge of maintaining perspective may play a role in creating bargains. Investors who get too wrapped up in transitory effects may push prices to levels that don’t reflect the long term value. When current conditions fade, as they will, that value may become apparent. Again, no guarantees.
Clients, if you would like to talk about this or anything else, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Once upon a time, we wrote that pretending present and future risk can best be measured by past volatility is akin to driving down the highway with eyes firmly planted on the rear view mirror. (Our theory is the future will not be like the past, so the windshield is a better thing on which to focus.)
The current market upset is the first one featuring the latest generation of so-called risk analytics. These high tech tools generate risk numbers for individual investments as well as entire portfolios. They are entirely based on past volatility. Incorporating frequent updates to the database of past price behavior and enabling near-instantaneous assessments expressed as an index number (say, 1 to 100), they seem quite scientific and highly analytical.
But all of this precision is predicated on the idea that past volatility is a measure of present and future investment risk. So in the latest version, it is like driving down the highway with eyes firmly fixed on an array of rear view mirrors, wide-angle and telephoto and high-definition.
The interesting thing is, when the inevitable downturn occurs, the ‘volatility equals risk’ crowd is quick to point out that their statistical methods are designed to predict what will happen, with a 95% probability. So if you run into a wall while focused on the rear view mirror, there was nothing wrong with the analytics – you just landed in the 5%.
Call us what you want, but a system designed to ferret out risk that fails exactly when you do need it to work may not be all that useful. (An elevator that does not crash to the basement 95% of the time would not be useful, either, in our opinion.)
We will continue to work with our understanding that volatility is a feature of long term investments. It necessitates a long time horizon, so the effect of temporary declines may be mitigated by time. Short term money needs to be kept out of long term investments. And we will keep our eyes focused on the future, not the past.
Clients, if you would like to talk about this or anything else, please email us or call.
One of the keys to successfully weathering the downturns in the market, large and small, is having sufficient cash to do what you need to do in your real life. That helps avoid selling long term investments at bad times.
A few weeks back we went through investment advisory accounts to check cash balances for ongoing monthly distributions and make sure we had cash positions to last several months. And in our reviews with you, we inquire about upcoming cash needs.
As our lives unfold, our situations may change. For example, we talked with a pair of young adults a few weeks back, a brother and sister, who each are completing advanced degrees. In infancy, they received a gift of shares of stock from their great-grandfather, an old friend of mine.
Their holdings grew over the years. Each one called to talk about the strategy for paying off student loan balances later this year with the value of the accounts. When it became evident that the holding period was down to months, we advised the sale of sufficient stock to clear their balances, at once. Money that you plan on spending in the short term should not be invested for the long term.
The moral of the story is to communicate with us about exceptional cash needs that develop. If together we manage your liquidity to avoid untimely sales of long term investments, you and we will both be better off.
Clients, if you would like to talk about this or anything else, please email or call.
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