To improve my delivery of information to readers, I’m going to try beginning each Alt Blend with a “The big idea and why it matters,” with the goal being that the busiest members of my audience can garner the primary point I’m attempting to convey and why it’s important in 30 seconds or less. I’ll then continue into the usual format for those interested in deeper insights, important nuance, and – of course – a smattering of other comments and bad jokes. As I’m currently listening to the audiobook Smart Brevity, it feels like the right thing to do. Feedback is always welcome.
The big idea and why it matters: Working toward one’s financial goals involves creating a sound financial plan and reliable investment process you objectively believe in and then sticking to them. Life and investing are riddled with uncertainty. Planning, along with a sound philosophy, supports us in making prudent decisions even during difficult times, and Alts can be a component of helping us stick to our plan.
And, now, the unabridged version:
“If you can’t describe what you are doing as a process, you don’t know what you’re doing.” -W. Edwards Deming (“business theorist, composer, economist, industrial engineer, management consultant, statistician, and writer.”)
I thought of a catchy, process-related (now obviously unoriginal) title for this post, but got more than I bargained for: it turns out that “Al Gore Rhythm” is “a thing” on the internet, including this song of the same name, which is one of the more interesting pieces I’ve ever heard (perhaps best described as “melodic prog-rock screamo”?).
Make a plan
A clearly defined plan is vital for working toward long-term financial goals. As the saying goes, “failing to plan is planning to fail,” which is sage guidance in many areas of life. Since investment returns and the path to those returns (booms, busts, grinding markets, etc.) are unknowable, it’s imperative to trust in a reliable process that prevents bad decisions from being made when the going gets tough. We’ll discuss all of that and where Alts fit into the conversation in this edition of Alt Blend. Here we go!
What’s your rithm?
It’s easy to overlook in the modern computer era, as “algorithmic” tends to make its way into headlines negatively associated with various financial trading schemes, but an algorithm is simply a series of steps for solving a problem. I’m not sure why that stuck with me, but it was one of the first lessons we learned in 10th-grade trig class circa 1996. Fast forward to 2024, and it turns out that the core of my career – i.e., financial planning – is nothing but an algorithm. It’s a series of steps to solve the problem of systematically working toward financial objectives while comprehensively considering all areas of one’s financial life: cash reserves, investments, insurance/risk, tax/estate/retirement planning.
It’s jazz, not AC/DC
I love the band AC/DC. For decades, Angus Young and company have rocked millions with the brilliant simplicity of driving 4/4 time signatures, combined with iconic riffs and a perfect “clearly distorted” sound. It’s the epitome of rock and roll – no pretentiousness or sleight of hand. If there’s an AC/DC song I haven’t heard yet, I already know what I’ll get. And I mean that in the best way possible, as it in no way detracts from, and actually may enhance, the joy it brings me.
The world we live in, however, is much more like jazz. As we’ve covered many times in Alt Blend, life is rarely straightforward. We have no idea what the next riff will be or when the time signature may change. The only certainty is that we live in a world of uncertainty. While the financial planning algorithm is straightforward, the underlying “facts” are laden with emotions and an unknowable road ahead.
Given precise information about every aspect of one’s situation (i.e., income, expenses, future events, illnesses, retirement dates, travel plans, dates of death) and the broader context of a plan (daily returns, correlations, yields, etc.), one could theoretically construct a perfect long-term financial plan, just as one could perfectly time the purchase and sale of a given stock to maximize profits while avoiding all loss. However, that’s not reality.
Uncertainty2 demands process2
Even when people are relatively clear about their goals (e.g., retire at age 67, travel, spend time with my family, and leave a legacy), many underlying details aren’t perfectly ironed out. On top of this, goals will often change along with circumstances, as sometimes the universe has a way of helping us reprioritize things. Combine that with the generally unknowable future of markets and the world around us, and you can see there’s a lot up for debate when it comes to modeling one’s financial situation.
What do we do about it? We use processes to develop a reasonably likely path from point A (where we are now) to point B (where we think we’d like to be in the future). The first process is what I’ve laid out above; financial planning that allows us to construct a long-term framework and investment approach by incorporating all areas of our financial lives. But the second, equally vital (or, perhaps, more critical) process is living through and adhering to the agreed-upon plan – especially when life and/or markets are in turmoil.
Keeping the Faith
A financial plan will result in a prudent asset allocation, but – regardless of what that allocation is – faith in it will be tested at some point. It may not be the obvious situation of avoiding panic-selling during a significant downturn in equities; instead, it may be a case of FOMO (see further below).
If you’re familiar with our team, you probably also know that we are advocates of a particular brand of Dividend Growth investing and private market investments. Remember WYOWYO (knowing what you own and why you own it), which can become problematic if one’s “philosophy” is simply “low-cost index investing,” for example. Those core strategies (Div Growth and a healthy dose of Alts) made for a relatively calm 2022, while global equity and fixed-income markets deteriorated. However, the same approach may have induced FOMO (fear of missing out) in a year like 2023 – not because the investments lost money in 2023, but rather because returns weren’t AS GOOD as some other areas of markets consistently touted in the headlines (perhaps you’ve heard of AI?). It’s our job to help our clients maintain their long-term focus and composure, whatever the concern du jour.
If you suffer from said FOMO, I’d encourage you to check out a recent Thoughts on Money post from my colleague, Trevor Cummings. In it, you’ll find the numerical impact on future returns when markets start from elevated valuations. Concisely, it’s anybody’s guess what happens over the next year. Still, over longer timeframes, investors will likely not get the returns they have come to expect from markets historically.
How about some Alts!?
From my standpoint, alternative investments offer characteristics that help us a) statistically increase the certainty of future outcomes and b) stick to our plan and allocation. How do they do that?
First (point a), they provide sources of risk that differ from public markets and even from one Alt to the next. If I can incorporate many of these idiosyncratic risks, the chances of all those things going wrong simultaneously are significantly diminished. It’s FAR different than simply hoping my bonds go up when my stocks go down (sorry about 2022) or vice-versa and calling that “diversification.” Also, higher current income from areas like private credit (vs. public fixed income) allows retirees to live on the yield of their portfolios more efficiently; this may reduce the need to sell assets, particularly during downturns, when it can impair the ability to recover.
Second (point b), often less-volatile return profiles of areas like private investments, combined with illiquidity, means people are less apt to bail on their Alts holdings. And, even if they wanted to, they may be unable to sell them! If the investment was made with a long-term intention (as it should have been), then that is a good thing and a way of saving people from themselves.
Find your “rithm,” stick to it, and enjoy life’s uncertainty (aka excitement)!
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
