It isn't Father's Day yet but I have been thinking quite a bit about mine, having spent the last week proofing my Dad's autobiography. Growing up in a Catholic orphanage in Detroit, and then at age 13 being sent out to make his own way in the world, he lived a life that would be quite foreign to most American's today.
With just an eighth grade education, he was easily the most intelligent and educated person I knew. He was an avid reader and lifetime pursuer of truth, leaving behind a massive library of books when he died. He preferred topics that educated the mind or enlarged the soul. The few works of fiction he owned would be those of a classical nature that taught great moral lessons.
My dad was not alive when Google filed for incorporation in 1998. With a stated mission to "Organize the world's information and make it universally accessible," my dad would have loved Google and the internet with its vast access to knowledge.
In the recent years I have begun to wonder if the internet has really made us any smarter, or has it just filled our minds with largely useless information. It seems to have turned us into a society obsessed with the pursuit of trivialities.
I was fascinated in 1998 when I first learned I could find the answer to any question on my computer. Now when I seek answers, or even when I don't, I am besieged with stories about Aliens in New York, cities on Venus, and endless conspiracy theories. The informational trash the world once reserved for the grocery store checkout line, now appears anytime my kids want to find the answer to a simple geography question.
All this information leads to increased confusion among investors, who are constantly asking me if I heard about the secret plan to abolish the dollar, or that China is conspiring to send the U.S. back to the stone age. (Never mind that China depends desperately on a healthy U.S. buying loads of their products.) We once use the internet to search for truth. Now it is often the untruths of the internet that come searching for us.
Like my dad, I love to read a good book. The time and commitment required gives you the opportunity to evaluate the information, ponder the theories, and formulate a personal opinion. Today's rapid fire internet delivery, often designed by marketing firms to sell you something, generally seeks to bypass reason and go straight for an emotional reaction. When these headlines and emotionally charged claims overshadow serious thought, we are at risk of making poor investment decisions.
In many ways the information rich modern internet fails investors in their pursuit of knowledge and ideas. Taking regular breaks from modern media to ponder wisdom in an old fashioned, well written book, would likely result in far less investing mistakes. There are many great books to choose from. Feel free to contact me if you would like some recommendations.
Like many desert dwellers, I love a good beach vacation. I have always thought San Diego had perfect weather, unfortunately too many other people think that as well. I heard that the average year round temperature in San Diego is about 65 degrees. Considering that includes nights and winter, who wouldn't want to live in such a wonderful climate?
A friend told me this week there is another popular tourist destination that also boasts a similar average temperature.They call it Death Valley. Contrasting the Death Valley winters that fall below freezing to the summers that can surpass 130F, it is clear that "average" temperature means very little in real life. Though Death Valley makes for an interesting visit, very few would want to live there, regardless of the average temperature.
I learned in statistics class that "average" can have many different meanings and is only useful as a measuring tool if you know the specifics as to how it was derived. In investing we hear of "averages" all the time, the most common being the average rate of return. It is not uncommon for investors to compare average rates of return of various investments, then make decisions based on those numbers. But unless you know the details of how the average was obtained, you may be like the uninformed Death Valley camper who shows up on a day when the temperature is hitting 130 degrees. The much milder yearly average temperature will be of no use to that visitor.
In investing, average rates of return have value, but at least equally valuable is measuring the peaks and valleys that you have to endure to reach the average. I imagine that most investors would be thrilled to achieve an average rate of return of say, 10%, but if they had to go through some years of losing 50% along the way - much like the volatile weather in Death Valley - I suspect most would say "No thanks." We tend to view investing as a numbers game, as a mathematical formula from point A to point B, but it is really much more than that. Investing is about lifestyle and peace of mind. A investment that grows well over time may be of little use to most investors if along the way its peaks and valleys create too much emotional distress.
When people plan vacations, rather than look at the average annual weather for the area, they look at the expected weather for the particular time of year they plan on traveling. When you invest, don't just look at the average returns over the past 5 or 10 years, but rather evaluate how those returns were obtained, what were the peaks and valleys, how did it respond to various unexpected events, and what is the likelihood of the future performance mimicking the past?
Failure to consider the statistical traps that surround the concept of averages can result in the investment equivalent of driving your family to Death Valley in August expecting to find beautiful San Diego weather.
“Ok Dan, make me rich.” Those were the exact words the young man spoke as he signed the document opening up his relatively modest account. “Wait a minute,” I replied. “Despite several meetings, somehow you have not understood what I do. It is not my job to make you rich, nor is it your doctor’s job to make you healthy. Likewise, your Lawyer can’t keep you out of prison and your minister can’t get you into heaven.”
This conversation was not unlike one I had with my Dad at 5 a.m. in the morning one day as he was waking me up to practice baseball. I had told him the night before that I wanted to be able to hit a baseball so I could play Little League like my brother. I distinctly remember wanting to be a great hitter, but I had no recollection of my request including waking up before sunrise to practice. I do remember my Dad telling me then, and many times since, that no one ever succeeded in life who wasn’t willing to get out of bed early.
Humans are creatures of habit. That which we do often, not only becomes easier to do, but usually difficult to stop doing. This tendency to be habitual can be one of our greatest tools, or worst enemies. Our prisons are filled with individuals who developed habits that were not in their best interest. Bad decisions are fairly easy to correct early on, but once they become habits, it takes an enormous and often painful effort to change.
In financial matters this same human trait can lead to a lifetime of financial stability and peace, or a daily struggle to survive. It is all about recognizing that if you want to be successful financially, you have to first realize that no one else can do it for you. They can help. They can teach. They can guide, but ultimately you are the one who needs to figuratively “get up early in the morning” and do something about it.
I once counseled a young person to make the decision early in life to set aside a little money each month for future needs. In a couple of years, she had built up a fairly respectable savings account. One day she suggested discontinuing saving so that she could spend more on her current wants. My response was that she was one of the few her age who had developed a financial habit that would bless her family her entire life.
Did she really want to lose that?
Being creatures of habit can be a curse or a blessing. Whether we are plagued by terrible habits or blessed by good ones, all depends on the decisions we make before the habits form. Can I make you rich? No, but I can guide you along that path if you are willing to develop the habits that will lead you there. Basically, you will need to make the decision to get up a little earlier each day, financially speaking.
Last week’s article generated several worthwhile conversations, one with a fellow advisor about another misunderstood financial topic. He told me his client base had lost all appetite for risk, forcing him to spend his time selling products with predictable outcomes. Knowing the products of which he spoke I jokingly responded, “You mean that predictably pay no return?” His quick response was, “Exactly!” He then said something that I have pondered all week. He said “Flat is the new up.”
During election years we have politicians who attempt to gain favor by promising to remove risk from life. Their, “A chicken in every pot” language promises that if they are elected everyone will have food, housing, healthcare, and free education. They promise to deliver these benefits regardless of efforts on the receiver’s part. They also promise to bring peace to the world without fighting wars and an end to terror without the loss of American lives. It is a slogan as old as humankind.
“Remove risk from life?” I ask. Would you also remove computers, cars, cellphones, airplanes, electricity and everything else that began when some ambitious individual decided to take a risk? Would we also send the pilgrims back to their “flat” lives in Europe? Would we turn back the great advances in the arts, science and even religion, that only came when those who wanted a better life took some risk?
I go to great lengths to make flying my airplane as safe as possible, but there is no denying the inherent risks in defying gravity. But along with the risks, I have experienced beauties that Solomon himself would have given all his wealth to see. I have gone places and visited people that have brought benefits to my business and clients, and great memories for myself and my family. “A life without risk,” you say? I would loathe a life spent in fear that I might scrape a knee on my way to experiencing something new and wonderful.
Are some risks too great? Of course they are. Just as I have experienced the joys of flight, my family has also spent several extra nights in airports waiting out a storm that posed too much risk. We must stay informed and exercise sound judgment, but to eliminate risk from life would be to eliminate all the wonderful blessings as well.
Do not flee risk, nor listen to those who say they can remove it from your life, or from your investing, for such is not possible. Look at where you are in life, and the great experiences you have enjoyed, and remember what got you here. It did not come from burying your talents for fear you would lose them, as the story goes, but from waking up and taking daily educated risks, risks that brought the blessings you enjoy today.
“Risk,” an often misunderstood word, is a necessary ingredient to enjoying life. I hope I never reach the age where I believe that “flat” in any area of life, is good enough. I want to always be truly looking “up.”
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, 1173 S. 250 W. Suite 505, St. George, UT 84770.
This communication is strictly intended for individuals residing in the states of AZ,CA,CO,DC,FL,HI,ID,IL,KS,KY,MA,MI,MN,MO,MT,NE,NM,NV,OH,OR,SD,TX,UT,VA,WA,WY. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.