My wife and I recently had a date night. For some, this may be a normal occasion, but for us, this is a rare occasion. With two little boys at home, you just don’t get out that much.
We are also foodies. We really enjoy trying new restaurants, visiting our old favorites, and indulging in good food.
Knowing that these nights are few and far between, we like to get the most out of the experience. This means appetizers, multiple dishes to share, and of course dessert. On this particular date night, I had a fairly comical interaction with the waitress and I will use this anecdote as the launch point for today’s discussion.
Let me set the scene…
You Don’t Want That… Trust Me
So, my wife and I are thoroughly studying the menu and sharing ideas back and forth on what we might order. The waitress comes by to introduce herself, take our drink orders, and asks if we have any questions about the menu. I call attention to one of the appetizers and ask the waitress for her opinion. She looks left, she looks right, and then leans in like she is ready to share a secret that she doesn’t want anyone to hear. She delivers the message with no words at all and just scrunches her face together shaking her head left to right, signifying that this menu item is not on her recommended list.
Needless to say, I took her advice and ordered something else. I chuckled at her response though, as it made me think of that old adage about eating your own cooking. If the chef or even the wait staff isn’t willing to order a particular dish, then maybe that item shouldn’t be on the menu.
The Investment Menu
I’ve always been blown away by how lengthy the menu is at Cheesecake Factory. Here’s a fun fact, the menu is actually 5,940 words. These TOM discussions are typically 1,000 words, so about six TOM articles would fit into one Cheesecake Factory menu.
In-N-Out Burger on the other hand has a very small menu. You basically need to decide if you want one hamburger patty or two, cheese or no cheese, and if you want your onions grilled. Now, there are some secret-off-the-menu tweaks you can make to your order, but we will save those for another article.
Unfortunately, in the world of investing the options available to you are much similar to that of a Cheesecake Factory menu than an In-N-Out menu. The investment menu is endless. You could buy stocks, you could buy bonds, you could be mutual funds, you could buy exchange-traded funds, you could buy options, annuities, hedge funds, etc., etc. etc. The menu really does feel endless.
Options Galore, Opinions Galore
For a financial professional, there are two decisions that need to be made:
(1) What will I recommend to clients?
(2) What will I personally own?
What I find interesting is whether or not the same answer will suffice for both questions.
As I mentioned, the investment options in the marketplace are extensive, but even this never-ending list is trumped by an even greater financial phenomenon – financial opinions. Everyone – amateur and professional alike – seems to have an opinion on how to invest and what to invest in.
It’s already hard enough to navigate through the cheesecake-factory-like investment menu, and when you add in the noise of opinions out there, it probably feels like ordering off a menu in a different language. In his 2017 publication, Skin in the Game, Author, Nassim Nicholas Taleb, offers simple advice for helping to cut through all of this noise, “Don’t tell me what you think, tell me what you have in your portfolio.”
This for Me, That for You
I’m personally bothered by the fact that some (many) investment managers do not own any of what they manage and recommend for clients. They don’t eat their own cooking.
According to an article in the Financial Times, “Half of the 15,000 mutual funds in the US are run by portfolio managers who do not invest a single dollar of their own money in their products, raising concerns about whether fund managers’ interests are properly aligned with those of their investors.”
Yikes. Buyer beware.
A Lesson Learned (Thank You, Mr. Bahnsen)
I cannot proclaim complete innocence in this area. When I transitioned from Morgan Stanley to The Bahnsen Group I brought with me some legacy positions I had in my personal portfolio. The Bahnsen Group was managing a majority of my personal holdings at that time, but I did hold back a few of my former investments.
David Bahnsen had some candid and encouraging conversations with me about the importance of alignment between investors and advisors. And he was right. I wanted to be able to tell clients that we owned all the same stuff, not just “mostly” the same. So, what did I do? I let these legacy positions sail off into the sunset and allowed my advice and actions to be bonded at the hip.
Little Menu, Lots of Customization
If you’ve ever been to In-N-Out Burger you know that the menu is indeed small, but each person’s order is unique. You could grab dinner with a group of 5 close friends and everyone’s order would be a little different. Me? I’m a Double-Double Animal Style with Fries and an Arnold Palmer.
In 2020, David Bahnsen published an internal memo to our team and clients that he coined Operation Magnify. David laid out the 7 ingredients that make up our investment menu at The Bahnsen Group:
- Core Dividend Equity – As the building block of EVERY portfolio
- Income Enhancements – For select clients who want a yield boost
- Growth Enhancements – For select clients who want a growth boost
- Boring Bonds – Up to the capital preservation comfort need of a client
- Credit – As a distinct asset class from bonds, offering high yield, but more equity-like volatility in distress events
- Alternatives (traditional) – To diversify sources of risk and reward
- Illiquids and Directs – For ultra-high net worth clients of a certain return appetite without liquidity constraints
Each of these ingredients is made up of a collection of investments and the categorization of each is based on its unique qualities around volatility, expected return, income, liquidity, etc. These ingredients, used in different portions and in concert with one another help to design a portfolio that can meet very specific financial planning objectives.
For me personally, my investment portfolio is made up of Core Dividend Equity, Growth Enhancements, and Alternatives. This combination is a perfect match for my financial plan and makes up 100% of my investment assets.
A Conversation Stopper
So, if you find yourself being flooded with someone’s opinions about investing, personal finance, and the such you now know how to simplify the conversation – “Don’t tell me what you think, tell me what you have in your portfolio.”
And this wisdom extends outside the realm of finance…
“Waiter, what do you typically order when you’re not working?”
“General Contractor, what type of flooring do you have in your home?”
“Doctor, do you take this medication? Or have you recommended it to family members?”
All this to say… Often actions speak louder than words.