“Achieving success is like hitting a moving target. Both require accuracy, the ability to counteract external factors, and adjusting the sight when necessary.” – Valerie J. Lewis Coleman (author/publisher)
My commute to New York City is most easily accomplished via bus. Our town of Leonia, New Jersey, is in a location such that making my way to a train or ferry doesn’t typically make a lot of sense from either a cost or time perspective. Instead, I have a short walk to the bus stop, a roughly 30-minute ride through the neighboring town of Palisades Park, down the scenic NJ Turnpike, and eventually (using a dedicated bus lane that usually avoids most of the traffic) through the iconic Lincoln Tunnel into the Port Authority Bus Terminal. From there, an easy 15-20 min walk across Midtown Manhattan gets me into our Grand Central office. It’s cost-effective, relatively easy, allows me to accomplish tasks on my phone, and easily gets 8000+ steps into my day. The downside? Lack of predictability. It’s impossible to know precisely when buses will arrive (the NJ Transit app is useful but far from perfect) or what traffic we’ll face due to weather, construction, or accidents.
Similarly, financial planning and investing (including Alts) involve a lot of unknowns. By accepting uncertainty, including the realities of volatility and inflation, we can plan accordingly to account for the moving targets they create while working systematically toward our goals – and that’s what we’ll cover today. Here we go!
Certainty in uncertainty
If there’s one thing we can say for sure about markets and investing, it’s that uncertainty is omnipresent. It’s the rule, not the exception. We don’t know (and cannot know) everything about a given market or investment, as there is an infinite amount of underlying information that rolls up to understanding the movements of markets and the success or failure of companies. Some investors get tripped up because juicy sound bites, headlines, or clickbait (depending on your preferred media medium) are confused with useful information for investment analysis.
The latest financial news, a liberal or conservative (take your pick) candidate winning the XYZ election, armed conflict, etc., inevitably results in investor concerns. To be fair, much of that concern may come from a good place. Most of us care about other people, especially our loved ones, and worry about what world our children or grandchildren will have to endure. Some of that concern is natural, but it is also vital that we keep a healthy perspective of understanding, as we also have limited control over any of it.
The real problem starts when the mind spirals into some variation of “this time is different” and then “what-iffing” about how our portfolio will inevitably crash, resulting in financial ruin.
Know WYOWYO!
As I think back on my career, I was undoubtedly guilty of more seriously entertaining the substance of the “the-sky-is-falling, what-are-we-gonna-do-now!?” conversations raised by clients every so often. These days, I’ll still talk through whatever the worry du jour is, as handholding is part of advising, but I already know the answer: we’re going to do nothing, structurally speaking. Volatility will eventually present itself, but we’re prepared to embrace it. The reason is simple: we already know why you own what you own!
If we’ve gone through the effort of constructing an appropriate long-term portfolio for you, then today’s Twitter trends shouldn’t change that. When clients (sometimes) lose sight of this, we can remind them of their personal financial plan and what it’s designed to accomplish and then look at each underlying component from the “WYOWYO” perspective. For investors who don’t have a holistic framework and sound investment theses in place, I’d imagine the temptation to hit the sell button (usually at the worst possible time) is much stronger.
Know thyself
When my older daughter, Ruby, was 2 or 3 years old, she’d draw on things she wasn’t supposed to – like the kitchen counter or walls (and now that Ruby’s 8, she still draws on things she’s not supposed to, but it’s more along the lines of doing makeovers on stuffed animals). After getting reprimanded a couple of times, she figured out a solution: when she found a pen, she would give it to my wife, Katie, or me. Ruby knew if she had the pen, she couldn’t stop herself from drawing with it, but she was also somehow self-aware enough to give it to an adult and prevent herself from getting into trouble. We adults could learn a lot from toddler Ruby. Not only would her simple solution solve many of our bad habits – as we can’t smoke cigarettes, drink beer, or watch TV in our bedroom if we don’t possess cigarettes, beer, or a bedroom TV – but it could also help when it comes to investing.
For traditional assets, an easy way to help build a buffer between you and your “sell button” is to hire an advisor responsible for the day-to-day management of your portfolio. That advisor should also remind you of your financial plan, prevent you from making rash decisions at all costs, and fire you if you insist on panic selling.
When it comes to Alts with some illiquidity – such as private market investments – we’re naturally building in additional discipline, as an underestimated feature of these investments is that you (or your advisor) cannot immediately sell them. I’ve often discussed the notion of “sacrificing” liquidity to access private markets and the different risk/return parameters we can seek outside of traditional markets. But that idea can be taken one step further: perhaps investors should have Alts BECAUSE they’re illiquid (if you’re a compliance officer reading this, these illiquid Alts would only be in situations where appropriate, of course).
Accepting inflation
…briefly back to my commuting woes, just this morning, the NJ Transit app indicated a bus was due to arrive at my local stop in 10 minutes. As I’ve been doing this commute since early 2019, I assumed I had an additional few minutes of cushion in that estimate. Sure enough, when the 10 minutes had passed, the bus was still 4 minutes away. By the time those 4 minutes elapsed, it was still a minute away (the app technology is more MapQuest than Google Maps, as it does nothing to account for traffic). Unfortunately, it’s normal for the arrival times to be a moving target like I encountered today, but an experienced rider can accept this and plan for it.
Similarly, when planning for longer-term goals, we must account for how inflation impacts costs over time. For younger clients who are decades from retirement, it can be painful to see how much the same lifestyle they live today will cost after adjusting for modest inflation levels during the next 30 years. But that same reality exists for those entering their retirement years in good health, as living 20-30 more years should be expected. Also, remember that current life expectancies are averages and only reflect our current understanding of health, wellness, and medicine; future breakthroughs could make lifespan even longer.
From my perspective, planning for a growing income stream that aligns with one’s lifestyle needs while outpacing inflation (has anyone heard of Dividend Growth?) is an ideal core component of retirement planning. However, step one of planning for inflation is accepting inflation and how it moves our planning targets. Step two (and steps three, four, five, etc.) is revisiting the plan regularly to make adjustments as life unfolds.
Staying the course isn’t the same as doing nothing
When I mentioned above that I know we’ll “do nothing,” it’s worth some parting words to add nuance to that statement. What I mean is that we’re not going to drastically alter your overall game plan based on events that don’t represent substantial changes to your life or goals. Many adjustments happen within the context of one’s financial plan and portfolio, including rebalancing accounts or parts of the allocation that have drifted significantly from their targets; adjusting underlying holdings; adding to Alts 😊; tax-loss harvesting; Roth conversions or gifting decisions; adapting to life’s changes. However, those adjustments will be based on a sound approach rather than the daily noise of the world around us. The targets will indeed move, but we will also “adjust the sight when necessary.”
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
