Batman vs. Superman
What makes a superhero a superhero?
According to Wikipedia, “A superhero is a fictional character who possesses extraordinary OR superhuman abilities and uses them to fight evil, protect the public, and make the world a better place.”
I think the “or” is key to this description. Some heroes have superhuman abilities (Superman), and some have extraordinary abilities (Batman).
When it comes to investing and financial planning, we should always focus on an extraordinary process and extraordinary execution, but shy away from anything seemingly superhuman. Actions that feel superhuman will later be revealed as tax evasion and/or Ponzi schemes.
The Batmans of personal finance will do the simple actions extraordinarily well and consistently. One of these superpowers is earmarking, which I’d like to discuss today.
The FAQ
As a financial professional, there is one common question you are bound to field from every uncle, friend, and in-law. It sounds something like this, “I’ve got some extra money, what should I do with it?” And, in true financial advisor fashion, you simply volley back a question with a question, “What is this money for?” Without knowing what this money is earmarked for or when it is slated to be used, it’s an impossible question to answer.
An interaction from Lewis Caroll’s famed Alice in Wonderland is probably my favorite description of this reality:
Alice: “Would you tell me, please, which way I ought to go from here?”
The Cheshire Cat: “That depends a good deal on where you want to get to.”
Alice: “I don’t much care where—”
The Cheshire Cat: “Then it doesn’t much matter which way you go.”
Alice: “—So long as I get somewhere.”
The Cheshire Cat: “Oh, you’re sure to do that, if only you walk long enough.”
So, if not knowing when or what the money will be used for is a weakness, then the opposite, earmarking the money for a particular time and purpose must be a strength.
Let’s take a closer look at that strength in practice.
Portfolio Design
As asset allocation became a more mainstream term, it lost its way a bit; the academic evolution of portfolio construction led to a drifting away from the original purpose for investing.
The vocabulary of the efficient frontier, modern portfolio theory, and correlations became a distraction from the reality that invested monies were intended to be spent in the future, earmarked for a particular purpose. This is not a dig on diversification, which is prudent and necessary, but rather a critique of the own-everything portfolio or the own-what-catches-my-eye portfolio.
Personally, I subscribe to a method of asset allocation that first asks, “When will this money need to be resourced?” and then assigns a diversified collection of investments to meet those resourcing needs. Tax implications, liquidity needs, time horizon, etc., are all accounted for. In the end, portions of one’s portfolio are earmarked for money that is to be used today, sooner than later, or much later. “Today” and “sooner than later,” money needs to be easily accessible and is assigned a low return expectation. The “much later” money will be more volatile, less liquid, but have a heavier burden or expectation to outpace inflation and drive wealth accumulation.
Too many investors rely on traditional allocations (e.g., the 60/40 portfolio) when these designs don’t match their future and current spending plans. The average investor is more likely to mimic the allocations of their peer group (age-based) than the unique needs of their own financial plan.
Perhaps said in a more simple and blunt fashion, there should be a clear and concise reason for how much cash you have set aside, for how much you’ve allocated to stocks, and everything in between. Stumbling into an allocation or doing “what feels right” or copying your neighbor’s plans isn’t the answer.
Leftovers
Earmarking expands beyond asset allocation. Earmarking is a relevant superpower for estate planning, as well. In my line of work, most of my clients’ financial plans, using conservative assumptions, will forecast leftovers at the end of the plan. The investor will leave their heirs a lump sum of money when their tour of duty is done. The practice of estate planning is primarily earmarking where those future leftovers should be directed. Whether that is a spouse, a second cousin, or The Save the Giraffes Foundation, the estate plan will define the benefactor(s).
The next evolution in this practice is simply toggling a financial plan to potentially bring future bequests (inheritance) into present gifts bestowed during the grantor’s lifetime. This yields qualitative benefits, enjoying the in-person experience of giving financial gifts to loved ones and charities, and sometimes quantitative benefits around taxes and estate taxes.
Pulling future gifts into the present is only possible through proper planning and earmarking. One’s ability to parse out the dollars needed during a lifetime and what the projected leftovers may be allows for this gifting flexibility.
Taken to an Extreme
I absolutely love what I do for work. As they say, “Love what you do, and you’ll never have to work a day in your life.” It wasn’t always so rosy, though. I desperately wanted to be a financial advisor as a young man, but had a ton of trouble simply getting a foot in the door. So, the start of my journey was in retail banking. I hated my job as a retail banker. The old Switchfoot lyric describes it best for me, “The shadow proves the sunshine.” My distaste and PTSD from that side of the finance industry just made me love and appreciate my career as an advice giver that much more.
My old boss at the bank was an earmarking junkie. Not for the right reasons, though, as he was compensated based on the number of accounts opened. A classic example of how incentives drive behavior. So, I endured a daily butting of heads with him as he wanted me to open up accounts for vacation savings, Christmas gift savings, a checking account for recurring bills, fun money savings, etc. An absolute earmarking overload that led to more confusion and expense than any purpose or value. Note, this well-known national bank would later suffer both financial and reputational damages for these types of sales tactics.
Now, the above is the extreme example, but I do see similar or slightly diluted versions of this in my interactions with investors as well. I find redundant account types with slightly different purposes across multiple banks/institutions. What was potentially once a plan to organize and earmark eventually became a tangled web of murkiness.
It’s important to remember the diminishing return of earmarking and that it may be your kryptonite if you overexert this muscle. Earmarking is the most potent when done with precision.
Closing Thoughts
As I said, aspire to be the financial equivalent of Batman, not Superman. Tactically use the tools available to you to maximize outcomes by executing the ordinary in an extraordinary fashion. All of your money should be earmarked. These earmarks should help to identify the right account type (e.g., a 529 plan or Roth IRA) and the right underlying investments (stocks, bonds, cash, etc.). No dollar should be floating around without an assigned purpose. You are the shepherd of your wealth, and there shall be no wandering sheep.
Again, not a rocket science concept, but one that is often overlooked. The late John W. Gardner perhaps said it most succinctly, “Excellence is doing ordinary things extraordinarily well.”
Trevor Cummings
PWA Group Director, Partner
