The big idea and why it matters: There are multiple approaches we see in wealth management that may be misunderstood, misleading, or leave room for improvement in most situations. For example, automatically reducing equities in favor of bonds as an investor approaches retirement, or spreading one’s portfolio across multiple investment advisors, may both result in misalignment with an appropriate financial planning framework.
“The secret of your future is hidden in your daily routine.” – Mike Murdock
“Umm, what? So, I’ve been doing it wrong my whole life?” I asked the dental hygienist, after she mentioned something along the lines of “you know you’re not supposed to rinse the toothpaste after you brush your teeth, right?”
Sure enough, when I actually read the tube of toothpaste at home later that day (for the first time in my life), it confirmed what she said. After reminding me to put the toothpaste on the toothbrush (nailed that part), the instructions end with “Minimize swallowing. Spit out after brushing.” No mention of rinsing whatsoever. A quick Google search and shallow dive into the topic uncovers more information, including that the “no rinse” method is mainly to help retain fluoride on one’s teeth, but also that kids should probably still rinse to minimize their fluoride exposure. So, maybe we can chalk this all up to a childhood routine that I just never strayed from, but perhaps you steered clear of this trap. Not dental advice 😊. Brush and rinse at your own risk. I’ll now anxiously await feedback from our dental-client community.
Twice as Hard?
I’m 100% certain that the Black Crowes weren’t referring to saying goodbye to rinsing when they crafted this gem of a song that would kick off their 1990 debut album, Shake Your Money Maker – a CD we did our best to wear out while testing the upper bounds of both our car stereos and eardrums. But, more to the point of the song, it’s also more challenging to break long-term habits or lines of thinking that are already ingrained in us. Thus, with continuous self-improvement in mind, today we’ll consider some common financial approaches that may leave opportunity for enhancement – even if it’s not easy. Here we go!
Less “risk” with age?
The question of “shouldn’t I be taking less risk as I approach retirement?” comes up regularly, and probably for good reason. A lot of retirement plans (e.g., 401(k) and 403(b) plans) include an offering of target-date funds, which shift allocations from stocks to bonds as time goes on; the nearer the date, the higher percentage of bonds in the fund.
While I don’t mind having those fund options available, I don’t think it’s a good idea to automatically reduce one’s equity allocation simply because retirement is nearing. Instead, investors should be taking the appropriate amount of risk for their particular situation, considering many factors, like wealth level, lifestyle needs, objectives, and “risk tolerance” (for lack of a better term).
Whereas you may be “punching out” for the final time after decades of hard work, our eternal foe, inflation, never sleeps. Although it may sound comforting to shift a portfolio from “risky” equities to “less-risky” bonds, collect income, and sail off into the sunset, that strategy could introduce far worse problems than market volatility. In particular, it significantly diminishes real growth potential and virtually eliminates the possibility for income growth, which will be needed to outpace inflation over decades of retirement.
And don’t forget that high-quality bonds were down mid-teens in 2022, and that through June 30th, the trailing 5-year return on a standard US Bond Index is a NEGATIVE -0.73% per year (-3.6% cumulative) – and that includes the income that would have been needed for spending. Given where interest rates currently stand, bonds should mathematically provide a much better opportunity over the next 5 years, but I raise the performance issue as a reminder that even high-quality bonds are not without risk (or volatility, the very thing people are often trying to avoid)! And the sorts of risk and attributes they come with – like having interest taxed as ordinary income for non-municipal bonds, generally slower recovery than equities in the event of drawdowns, and the inability to grow income with inflation – can actually work against retirees.
Risk is the permanent impairment of capital, NOT market volatility. Plan well, tune out the noise, and embrace volatility wherever possible.
Too many cooks in the kitchen
Here, I’m referring to spreading a planning/advisory relationship across multiple advisors. It can be done with the best of intentions, and the rationale we often hear is:
- Attempting not to put all proverbial eggs in one basket, and/or
- Trying to run an investment returns race to see which advisor “does better.”
I give the benefit of the doubt that the underlying motive in these cases is self-preservation via real or perceived diversification. However, it is also a way of telling your advisor you don’t trust them without telling them you don’t trust them. The message can be sugarcoated in a variety of ways so it may not sound like a trust issue on the surface (i.e., “I’m just not the type of person who puts all of my investments in one place”), but if we boil it down to the core underlying element, it’s a lack of trust/faith in the person, the approach, or both.
One of the only things we know for sure is that – given two different strategies – one will outperform the other at some unknown point in time for some unknown length of time. Markets and investment strategies can only be adequately measured over “full market cycles,” which introduces another problem: the term “Full market cycle” can be subjective, and what really matters is whether your strategy is meeting your goals and objectives. The “market” is irrelevant. Your friend’s hot stock idea is irrelevant. And your overall long-term financial well-being does not require the best investment return. Instead, it requires the proper planning framework and an appropriate strategy within that framework.
Want to know a great way to diminish the ability of an advisor to create a proper framework and affect an appropriate investment strategy, plus add unnecessary cost and complexity to your planning approach? One way is to spread a financial planning mandate and portfolio across multiple advisors. I say that half-jokingly, but for those who find themselves in the multi-advisor situation, consider the wasted time, hassle, higher costs, and inefficiency you may be able to leave behind.
It’s also important to be clear about what I am not referring to. Given you have a sound financial plan and core portfolio that provides a path for your long-term needs, then some items can (and should) naturally fall outside of that relationship if desired. Some people are genuinely interested in investing. Sometimes that comes in the form of a reasonably-sized day-trading account. Others may manifest as one-off real estate investments or funding startup ideas of friends in their network. At a certain level of wealth, it is a luxury to be able to capitalize on those types of endeavors, and, as we covered in For-Profit Charity, those projects can change lives and create opportunities in underappreciated ways.
From my advisory perspective, as long as I know we have an in-depth understanding of a client’s financial picture, and we’re in control of enough of their wealth to assure they are on track for their goals, then that is what ultimately matters to be able to fulfill our obligation.
Other opportunities and Alts ahead
We’re now only two items into a list that includes a few more, and this entry is too long already, so we will plan to continue learning about some other areas of opportunity in the next edition.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
