A helicopter pilot told me how much cooler his aircraft was because he can go anywhere and land anyplace. He has ultimate flexibility. I agreed a helicopter is a wonderful tool for the mission that it’s designed to do, but if that pilot and I jumped in our respective aircraft and headed off to Dallas, I would have had lunch and gotten in a round of golf before he would have touched down. The engineering design that allows a helicopter to land vertically, also makes it difficult for the thing to go very fast. With flying there are always trade-offs.
Having the right tool for a job is also critical in investing. People often ask their financial advisors to do a job for them, but then deny them the proper tools. Much like telling a pilot you want to go to Dallas in a hurry, and then insisting he take you by helicopter. One tool I often see investors reject without fully considering its potential value is the tool of illiquidity.
Our country today is awash in liquidity. For evidence, ask your bank how much interest they would pay you for a $100,000 deposit, fully liquid. The rate they offer will likely start with a decimal point. Now tell them they can keep the money for five years and watch the rate jump up towards 2% (bankrate.com). That’s about a 20-fold rate increase on the same dollars just by giving up some liquidity.
We all want liquidity but some investments cannot tolerate it. Imagine for a moment you want to open a restaurant with a partner, but your partner demands full liquidity of her investment. That condition would very likely make the partnership unworkable.
In the public investing world, many successful investments are illiquid as well, and yet some investors will routinely reject an illiquid investment because they want full liquidity. I understand we have an emotional attachment to cash money. We love to have it in our hands. We want a big pile of it under our bed. But many people keep far more of it liquid than they will ever need. This unnecessary need for liquidity, as in my example with the bank, can actually deny us the potential returns many illiquid investments can offer.
I view retirement money as the goose that lays the golden eggs. Where possible, you want to spend the eggs and avoid eating the goose. Illiquidity can help protect the goose, especially if, in the process, it results in more eggs.
Like a helicopter, a liquid investment can be very flexible, but it will also have its own limitations. Decide how much liquidity you reasonably need, then don’t be afraid to tie up some of the rest of your money in illiquid assets. If you aren’t going to spend it anyway, then being liquid may be robbing you of potential opportunities.
We need to get past this idea that illiquidity is inherently undesirable and recognize that sometimes it may be just the right tool for the job.
When I was 12 years old I had a very unique job. My Dad had a business that distributed movies to elementary schools. The movies were on 16 mm film which was prone to breaking so when they came back rom the schools, my job was to scroll through them and repair any damage. It was a great job that put a lot of nice spending money in my pocket.
Recently I stumbled across the logbook I used to keep track of my earnings from that job, which also contained a ledger on my spending. My logs showed that I promptly spent all that I made, not being too concerned because there would always be more. At least that is what I thought until one day my Dad informed me I would not have any work for a few months due to the summer break. I was devastated. I had so many plans for the money that I had come to assume would always be there.
Some say a recession is only a recession when it hits home. Therefore, this experience qualified as my first personal mini recession. My summer spending plans had to be trimmed back as I learned the sad lesson of not preparing for economic slowdowns, even at 12 years old.
In 2008 our nation went through a terrible recession. People lost their jobs, their homes and their lifestyles. It is easy to find blame for the sorrow of that recession; poor government policy, Lehman Brothers, irresponsible bank lending, and others but really when you think about it, the bulk of the tragedy was self-inflicted. Too many had borrowed too much and were living at the edge of their means. When a setback occurred, it was greatly exaggerated because, as a people, we were not prepared as we should have been. If we had spent less, kept mortgages at reasonable levels, and saved a little better, the recession of 2008 would have been far less painful.
Some are beginning to worry that another recession may be near. Recessions have always been a normal part of the economic cycle and some leading indicators are beginning to point to the next one, but I do not fear recessions. In many ways they can be good medicine for an economy that may need a reminder. They force families, businesses and governments that have gotten financially careless to re-evaluate their spending and streamline their operations. Like an occasional illness, a recession reminds us to take better care of ourselves when times are good.
When the next recession comes there will be those who are unprepared who will blame economic events for their sorrows. There will also be those who have managed their money in such a way that they are able to ride out the slowdown and come through it in fine shape. The next recession will even provide opportunities, as the last one did, for those who are financially prepared to take advantage of it. Do not fear a recession, just
fear being unprepared for one.
They say you can't fight city hall. Those who have tried quickly learn that the ones you are fighting are also the ones who make the rules. Not surprisingly, the rules always favor them.
So it has been since 2010 when government regulators sought to take control of our retirement accounts in what became known as the Department of Labor (DOL) Fiduciary Ruling. Like most government actions, it began with good intent; a desire to require financial advisors (FA) to act in their clients’ best interests. Investors would be surprised to learn that under current regulations most advisors are only required to offer their clients investments that are considered “suitable.” The difference between the two standards is confusing, but significant. A comparison might be a car buyer being sold an expensive vehicle they don’t want or need, but would still be considered legally “suitable” for a person looking for transportation. Or perhaps they wanted a Toyota but were sold a Yugo. It could be argued both are “suitable” vehicles, but most would not consider a Yugo to be in their long term best interest. The lower bar of “suitability” has resulted in many investors being sold products that are technically “suitable” but not in their best interests.
As a CFP® professional, I have always been required to act in the best interests of my clients, so I strongly support a uniform Fiduciary standard. Unfortunately, as the debate progressed, aggressive government officials added a mountain of additional rules that would have stripped investors of their rights to invest their money as they pleased. These many additions turned a good idea into very bad public policy. I have written and spoken much on the topic and pleaded, along with many others, for individuals to let their voices be heard in opposition to the regulatory monster that was being created, though I had little hope government would listen. Despite enormous opposition, the DOL pressed forward, claiming executive authority from the 1974 ERISA act.
This week when the ruling was released, the industry was shocked to hear the DOL had backed down. Rather than exercising substantial control over all retirement accounts as they had threatened, they reverted back to the initial goal of requiring all FAs to act in the best interests of their clients. As a note of clarification, this new ruling only affects retirement accounts so investors should be aware that in their non-qualified accounts, the lower standard of care will still apply. Don't expect City Hall to make sense.
I am pleased the DOL has given up on its plan to take control of how you invest your money. I offer my sincere thanks to my readers, clients and other like-minded people who wrote letters and spoke out in opposition to this government overreach. Your voices were heard and city hall responded. I am thankful we will finally have rules in place requiring all financial advisors to act in the best interests of their clients, which they should have been doing all along.
Most everyone in my generation spent Sunday evenings watching “Mutual of Omaha’s Wild Kingdom” followed immediately by “Wonderful World of Disney.” Just the mention of those two names to anyone over the age of 40 will bring a nostalgic smile as they are immediately transported back to quiet family evenings with fresh popped popcorn, (not the dry micro wave type), and real butter.
Unlike the fast paced delivery of modern television hosts, Marlin Perkins was wise, calm and almost grandfather-like to millions of Americans as he introduced us to the wonders and beauty of the animal world. Disney followed with movies that featured Norman Rockwell type characters whose stories usually focused on faith, family and American values.
Today my family has digital cable, Netflix, Apple TV, Amazon Prime, Hulu and a dozen other sources for content viewing with hundreds of possible channels and programming options. All are available right now, right here, even on your phone any time of day. And yet today my family watches almost no TV at all. Any time we sit down to find something I hear the same complaint. With thousands of options the most common phrase is, “There is nothing to watch.”
A couple came in seeking help selecting investment options in their 401(k) plan from work. They were confused and, not having much investing experience, needed help deciding how to allocate their accounts. As I looked at the investment choices it became apparent why anyone would be confused. There were so many pages of investment options, even a professional advisor would need weeks to sort through them all.
There are currently approximately 8,000 mutual funds and 4,000 ETFs*, not counting the 19,000 individual publicly traded stocks and a myriad of other investment options. We think our information age has made things better by allowing so many choices, but like the seven TV’s in my home that are rarely used because there is never anything worth watching, is it possible that in investing as well, more is not always
Portfolios can get cluttered and need to be cleaned out once in a while. As I have studied investors I have found that the more successful ones often have surprisingly few investments. Warren Buffet, for example, built his fortune by carefully selecting relatively few options. Diversification can be a valuable tool, but there is a point at which you have so many things that it is nearly impossible to track or understand them all. My experience with investors has been that most portfolios can be improved by reducing the number of holdings to a more manageable level.
I currently have over 1,000 television channels but my family TV watching was more enjoyable when I only had four. If your portfolio has gotten out of control, take some time and bring it back to a manageable level. If you need some inspiration, do like me and watch an old Fred MacMurray movie and it will remind you of a time when less was definitely better.
I awoke this morning to an emailed picture of the small feet of my daughter, swollen and bandaged, from having walked many miles in shoes better suited for going to church. Tracie is serving an LDS mission in Paris, France, and due to the Belgium terrorist attacks that killed and injured so many, including her friend Joe Empey, she and the other missionaries have been told to avoid public transportation. Being committed to seeking out the good in people, they simply walked to their appointments.
Is was not easy to keep my mind on investing this week, for in each attempt it kept drifting towards things of much more significance than money. As I pondered this “war” in which we are engaged, I marveled at how many lives are damaged over the actions of so very few. I realized that most wars are started and perpetuated by a relatively small handful of individuals, yet they cause so much suffering.
It would seem disrespectful to compare a physical war to anything financial, and yet I couldn’t help but think back on the damage caused to the lives of so many by the actions of so few in the financial world. The Madoff’s, Millikan’s, Enron’s and Lehman Brothers’ of the world have left millions with huge losses, decimated retirement accounts and empty pension plans. We use the trite phrase, “It’s only money,” but when you are retired and all you saved is taken from you, the damage goes far beyond money.
During election years our fears are magnified by candidates calling out “Corrupt Wall Street,” or “Corporate greed.” Inevitably they propose to protect investors through regulations that often end up causing more grief than the problems they are trying to the correct. (Images of a young mother having her infant’s bottle taken away in an airport security line come to mind.) As I pondered the state of our fearful world this week I was reminded of the inspiring words of Anne Frank who said, “In spite of everything, I still believe that people are really good at heart.”
I know most of the financial advisors in this area. I know many leaders in industry and regularly visit with key decision makers in many of Americas top companies. I find that the vast majority of them are good, honest, hard working individuals who are trying to do the right thing. Though they certainly have different skill levels, in their hearts they are good people. There will always be some individuals with bad intentions, but investors can largely protect themselves by exercising common sense judgment, using proper planning techniques, and diversifying their assets.
I absolutely reject the common election year rhetoric which implies that most people will take advantage of you if given the chance. With my daughter trudging the streets of France, I believe most people are inherently good and that acting, or thinking or even investing otherwise, leads to a less than fulfilling and often unhappy life.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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