Have you ever taken the Enneagram? If not, you should check it out; it’s a personality test. For those familiar with the Enneagram, you know that each person falls into one of the 9 personality types. I’m a “1,” also known as “The Perfectionist,” “The Reformer,” or “The Idealist.”
This is the lens through which I see the world. And this can often be a very rigid view. To me, things are black or white, left or right, right or wrong. There is not often any in-between in my paradigm. This can be a very frustrating personality to deal with; just ask my colleagues, or better yet, ask my wife.
In the language of computers, you have a binary system made up entirely of zeros and ones. It took me a long time to realize that the language of financial planning is not binary. For a perfectionist, it is very hard to break out of the mode of complete optimization and maximization. As I’ve matured as a planner, I’ve learned how incredibly important the qualitative factors, the psychology, and the investor’s preferences are to the equation.
Today, I’d like to dig into three examples of where we often get stuck thinking through financial decisions in a binary fashion – this or that. I’ll introduce the power of “hybrid” options and hopefully encourage you to expand your perspective when it comes to financial decision-making.
Retirement
The question that all of us will address at some point – should I retire?
For most, this will lead you into a conversation surrounding “when.” Toiling over the idea of when you will retire. You meditate on the binary options of now vs. later.
We introduced today’s discussion with this concept of going beyond binary options. I often find myself telling fellow advisors and clients that the art of financial planning is all about laying out a plethora of options on the table for each financial decision and then weighing those options against one another. Looking at the costs and benefits of each, the pros and cons, and deciphering which option best matches your personal objectives.
So, does the question surrounding retirement have multiple options? It does. A good friend of mine just began to scale back her hours at work. She’s worked with her team to phase out her responsibilities and create a sort of glide path into retirement, from full-time to part-time to no-time. For her, this was a very comfortable option, personally and financially. It was also very helpful to the organization so that they could acclimate to the transition. I’ve seen clients transition out of their primary employment to consulting work. Others have gone from paid employment to volunteer commitments. Still, others have made career changes that re-focused the primary objective from income maximization to maximizing for purpose and fulfillment.
The conversation around retirement should be one chock-full of options. Often we talk about too many options being overwhelming and creating the feeling of choice overload. In financial planning, though, it’s often quite the opposite. Knowing we have options and that we can customize a sort of hybrid solution that brings together all of our favorite aspects of different options is very much a freeing or burden-relieving concept.
Perhaps retirement is not a finish line but rather a checkpoint or pivot to the next exciting stage of the journey. I can’t tell you how many times I’ve heard, “I thought I was retiring, but I find myself busier now than ever.”
Concentration
For some investors, they’ve built great wealth with one particular investment or stock. For some, it’s a business they own; for others, it’s a stock they’ve owned (or inherited) for many years.
Again, those conversations often start out as “Do I keep the business/stock or sell it?” Imagine how incredibly difficult that question is to answer. The nostalgia alone makes this incredibly challenging – the memories and the life-changing impact these investments have had on someone’s life.
What’s the key here? It is not a this-or-that planning decision. You have options, and you need to explore all options to see what matches your personal preference and objectives best. Part of your process should be to start by just listing as many options as you can before you even start weighing the decisions against one another.
I have multiple clients I am working with now that we are dollar-cost-averaging out of some highly concentrated investment positions, selling a fixed amount of shares over a defined period to stretch the tax liability and eliminate the difficulty of choosing the “perfect” time to sell the position. Often in this process, we will keep some remanence of the position because of that nostalgia, creating a sort of investment memorabilia in one’s portfolio. In other situations, we’ve initiated a customized tax strategy that allowed a client to exchange a concentrated position for a more diversified portfolio without triggering a tax consequence. For some business owners, we’ve helped to initiate an ESOP to generate liquidity for the founder and help create ownership opportunities for their employees.
And the list of examples could go on, but the primary concept remains that we need to devote ourselves, in the beginning, to lay out options that go beyond this or that.
Asset Allocation
There is a natural draw/desire for investors not to want to own what has performed poorly recently. The blemishes within one’s portfolio quickly become the target for pruning. Today this might be emerging market investments or high-quality bonds. Still, before, it was energy stocks, and a trip further in history would show that each asset class and industry was a dog at some point for a particular season.
Again, these blemishes trigger questions like, “Should we keep or sell?” Another light switch financial decision where an investor is looking to turn something on or off.
If you are a client of The Bahnsen Group, you receive an email every Wednesday titled, “Weekly Portfolio Holdings Report.” This commentary peels back the curtain and highlights our latest views on particular holdings in the portfolio and the activity within that portfolio. Yes, this report highlights when we sell out of a position or buy a new position, but a more common activity than that is when we trim a position or add to an existing position. This is a simple example of a hybrid option – it’s not always a wholesale buy or sell. Sometimes we are trimming the size of a position that has done quite well for risk management reasons. Other times we might be adding to a beat-up investment where our thesis remains the same from the original purchase date, and we are excited to add more at a better price point.
So before you decide to ditch this or that allocation, you should consider your options and work with your advisor to decipher which solution best matches your financial plan. Our preferences do matter, but there may be some financial decisions where we have to subordinate our feelings and preferences for what’s in our best financial interest – these are often the most difficult decisions.
Closing Remarks
Perhaps today’s topic was obvious or intuitive for you. I will tell you for me, it wasn’t. It has been a long journey as an Enneagram “One” to understand the reality that there isn’t always a “best” option and that not all financial decisions can be computed with a calculator.
Let’s be honest; this is still a frustrating reality for me and one that I am daily maturing through. Financial planning is a journey, and it’s a dialogue. Sometimes what was best for you personally yesterday will not be the most appropriate option for you tomorrow. This constant exercise about being aware of the options available, knowing your plan and objectives, and being able to compare/contrast against your goals is the key to financial planning.
Clients can attest to this; I always say, “Put ALL the options on the table – as many as you can, even if some seem silly or not something you’d see yourself choosing – and weigh them against one another. Look at the costs, look at the benefits, look at the pros, look at the cons.”
Our greatest challenge in this practice is when we butt up against one of our own areas of stubbornness, pride, or pain. Will the investor with no debt at least consider the benefits of a mortgage when they buy their retirement home? Will the investor with a personal history of stock market disappointment consider if stocks should play a role in their portfolio? Will the tax-sensitive investor be willing to consider the opportunity cost associated with not making an adjustment in their portfolio?
Money is made up of numbers and math, but people own money, and people are made up of emotions. Our fear, our greed, our hopes, and our dreams are all part of the planning process.
Not everything is black or white, left or right, right or wrong. Sometimes we have to live in the in-between and craft solutions that bring together the best aspects of multiple options, solving for both cents and sense.
As it is often said, financial planning is both an art and a science.
