Our African safari included a tracker who sat in a chair mounted on the front of the jeep. Over multiple game drives we gained a great appreciation for his remarkable skills. Each drive would begin with his asking what we wanted to see that day, and without fail he would find it for us. Whether a full-mane lion, a pack of wild dogs, or a baby rhino, our tracker was able to find them. Even though the dirt roads were covered in dozens of overlapping tracks, he could pick out, from a moving vehicle, the specific animal we were looking for. One time while searching for lions he motioned for the jeep to stop and then jumped off and came around to my side. He pointed to the dirt and said, “Lions, heading northeast, less than an hour ago, large group with a few cubs.” As I looked down all I saw was bumpy dirt. So, he bent down and drew circles around the tracks so I could pick them out.
I shook my head and asked, “How do you do that?” To which he replied, “A lifetime of practice.” He explained that his dad was a tracker and that he began tracking with him as a young boy. He started with small animals and as his skills improved, moved up to larger game and eventually to the big cats. He told us there is nothing more dangerous than tracking a predator since they may also be tracking you.
Sometimes as a financial advisor I feel like a tracker. I walk among thousands of investment options, searching for a specific solution for a clients’ needs. I pass the tracks of many other investments that could potentially confuse the search or lead me in the wrong direction, but I stay focused. Most investment firms have clever marketing that further confuses the task. Over my years of experience, the search has become easier. Like my tracker friend, what once seemed difficult now comes more naturally as I search for that specific track in the sand.
On several occasions our tracker would leave the safety of the jeep and walk off into the trees, unarmed, in search of a large predator. His years of experience gave him confidence to do what few could do, or would be willing to do so that we, his clients, could follow in the relative safety of our jeep to reap the reward. His years of experience gave me confidence as we sat in the jeep within touching range of huge bull elephants or a pride of lions. Though the animals were sometimes a bit frightening to me, I trusted his skill and judgement.
Investing is sometimes unsettling. The unknown can even be frightening at times. Having a seasoned guide can make all the difference. Our African safaris reminded me that there are some things in the wilds of Africa, and in the jungle of Wall Street, that only age and experience can prepare you for.
As a pilot I am often asked, “What if something goes wrong?” Things do go wrong sometimes, but passengers rarely hear of it. They go wrong for commercial pilots too. In one funny exchange I heard a commercial pilot announce an urgent landing due to a “strange smell in the cockpit.” That definitely generated a few chuckles.
So, if things regularly go wrong why are accidents so rare? It is because aircraft engineers understand that everything will eventually fail so they design planes with several layers of backup. Planning for failures by having contingency plans makes most problems non-events.
On one flight my altitude indicator quit, but I had four more. When I landed safely, I had the instrument repaired. A challenge for aircraft engineers is, what if a single event takes out everything? This is known as a single point of failure. For example, a lightning strike might create a surge that disables all electronic equipment. To protect against this, engineers design redundancy in such a way to reduce the risk of a single point of failure. For this reason, I have backup instruments that are not powered by electricity.
Investors face the risk of failure. Occasionally stocks fall, real estate slumps and bonds default. We must accept that upfront. My opinion is that one of the greatest risks to investors is a single point of failure. In 2008 many people suffered terrible financial losses because a single economic event took their whole portfolio down, and most importantly, they did not have sufficient backup in place to get them through while the markets were being repaired.
An airplane is an amazing tool and a great blessing to humankind. Parts of it fail occasionally but that does not eliminate its value or justify avoiding its use. It is just a reminder to have backup as well as a plan to avoid a single point of failure. Wise investing has also brought many benefits to countless individuals. Things fail sometimes but that does not eliminate its value or justify avoiding its use. It’s a reminder to have a backup plan that also attempts to protect against a single point of failure. I frequently discuss the power of diversification with my customers, since assets can react differently to an economic event.
If a person could have bought the DOW Jones index* in 1892, its 127-year average returns would have likely put a smile on their face. Yet all of the original DOW members are gone except General Electric, which is clinging to life. This most famous of market indexes has succeeded despite regular individual failures.
Manage your portfolio like an aircraft engineer. Accept that occasional failure is normal. Have backup plans to keep you flying. And try to diversify in such a way to avoid, if possible, a single point of failure. Avoiding some failures is not possible, or even necessary. Continuing to move forward in spite of them should be the goal.
Launa and I recently returned from a photo safari to Africa. Even though it was on our bucket list, we had some apprehensions about this trip given the immunizations, safety warnings, political uncertainties, etc.. The unknown always brings with it some anxiety and so we did all we could to educate ourselves on our destination. As it turned out, Africa was one of our favorite trips ever. There is so much beauty there, in the land, the animals and especially the people.
As part of the plan we decided to travel during the dry season. The temperate part of Africa where we visited has two main seasons, a wet and a dry. During the wet season it rains almost every day and the land is lush and green. During the dry season it rarely rains, the landscape dries out, and water is difficult to find. One would think the beautiful wet season would be a better time to travel, but we had read that there are benefits to travelling when it’s dry. Though the trees are mostly bare and the fields dry, the lack of vegetation makes it much easier to see the animals. During the wet season there are lots of animals, but the abundant vegetation gives them many places to hide and an easier life. During the dry season life becomes tough so only the toughest animals survive. Those that do are easier to find as they congregate around the few watering holes and streams that remain. So, for those looking to see the strongest animals, and their interactions with each other, the dry season is the best time.
The economy also has its wet and dry seasons. Often investors are tempted to rush and buy during the good times when markets are strong and profits are rising. But the problem with good times is, it is very difficult to distinguish between good investments and bad. It is easier for a weak business to succeed when the economy is strong, and investors can be lured into buying companies that may not be able to withstand the economic dry seasons that surely will follow. I find that investing when times are tough is perhaps the best time to find great companies. Like the animals, if a company can do well during the dry times, they may be a good candidate to flourish even more when the spring rains come.
After 10 years of economic strength, many companies have gotten fat and happy and perhaps a little sloppy. Feasting on the lush economic forest from the steady rain, these businesses may not survive as well when the next drought comes. When I review investments, our office does what we call an economic stress test. Our goal is to calculate how certain investments might do when the rains stop. Assess your own investments. They may have done well during the easy rainy season, but how will they fare when things dry up? Todays’ profits won’t matter if you give them all back during the next drought.
I am pretty happy this week because our St. George airport has finally re-opened after being closed for runway repairs. Though only a few years old, the runway had become unusable due to damage from underlying expansive soils. The loss of air service, and the high repair costs could have been easily avoided had the runway been built properly in the first place. Site engineers initially recommended procedures to protect against the well-known soil problem, but government officials did not want to spend the money. As is often the case, the cheaper route ended up being the most expensive.
It’s common for people to do things on the cheap up front, only to pay a much higher cost down the road. Investors are prone to this same tendency as they resist spending the time and money to get things right the first time. Here are just a few situations I see regularly where people know what they should do but try to cut corners anyway.
1 – Not saving enough. I suggest saving 10% of income during the working years, but 5% at a bare minimum. Not doing so when you are young can result in a financially difficult retirement.
2 – Not buying sufficient life insurance. Unless you are unhealthy, term life insurance is very inexpensive, while the cost of not having it can devastate those left behind. I married my wife, Launa, after she had been widowed at the age of 22, with two small children. I see no excuse for not having basic life insurance if people depend on your income.
3 – Not getting some financial education. If you don’t take the time to learn basic budgeting and investing concepts, the mistakes you will make can be costly.
4 – Not being willing to hire professionals. I know more about income taxes than most people, yet I pay a CPA to do my taxes. I have a pretty good understanding of legal matters, but I pay lawyers to do my personal and corporate legal work. I have extensive knowledge of investing, yet I regularly pay specialists to teach me more. Hiring a CFP® professional to help with your financial planning may help you avoid expensive mistakes.
5 – Not hedging a portfolio. It’s fun owning an all growth portfolio, until a recession comes. Balance your account with some lower earning investments that are less affected by market swings. It will cost you a little in returns when times are good but may save you from a painful loss when things turn ugly.
6 – Not correcting mistakes. Spend the time to review your investing mistakes and learn from them so you don’t repeat them.
Nothing looks more beautiful to a weary pilot at the end of a long flight than that lovely runway out the window. Nothing looks better to a weary worker as they approach retirement than a well-planned and properly maintained retirement account. In both cases, success depends on being willing to spend the time and money upfront to do it right.
I would like to share some thoughts with my younger readers. In my youth I remember thinking there were two types of people, old people and young people, and I was one of the young ones. I never realized I would one day join the other group until recently when I entered a crowded waiting room and a member of the “young” group stood up and offered me their seat. I wasn’t sure if I should be grateful or offended.
In young adulthood, Americans have a mountain of ambition, energy and responsibilities. A house, car, education, children and the never-ending school fund raisers take their toll on a young family’s budget. Each item demands priority as often-meager funds are allocated. Young people also know they should start saving for retirement but with so many other needs, many decide to put it off. This is not surprising since few people in their 20’s can comprehend actually being 70 one day.
A person fresh out of school can expect to work for 30-40 years, followed by another 30-40 years of retirement. Consider the financial math of that reality and you will see the need to make an early and regular friend of the power of compound interest. Simply put, you must get some of your dollars set aside and working for you, or those last 30 years may be very tough.
Young people regularly tell me they simply can’t afford to save for retirement, but when they have some extra cash, they will set it aside. As the years go by most learn the harsh reality that “extra cash” is never going to magically appear. Some current need or want will always try to take priority. And so the best and perhaps only way to solve the challenging math of retirement is to make saving for it a non-negotiable part of your young budget. You must start early and save regularly. Doing so should be as important as budgeting money to put food on your table, because one day that is exactly what it will do.
If it seems difficult to live on a tight budget while you are young, healthy and working, imagine how tough it will be when you are old, unhealthy and unemployable. You owe it to your future elderly self, to set aside money today because the person in the best position to care for you financially when you are 70, is you, while you are still 30. Let me emphasize that point. No government program, charitable organization, or well-meaning family member is in a better position, or has a greater motivation to care for you at 70, than YOU while you are still 30, 40 and 50. Start today and make the financial well-being of your future self a personal priority by regularly investing into a retirement account. Believe it or not, you will one day join that group of “old” people, and when you do, your elderly self will be very grateful for the sacrifice the young you is making today.
I have decided this week to list a few areas of the economy that I believe are worthy of a look by investors. I base my thoughts on the well-known elephant theory that I teach regularly. It is that if you want to capture an elephant, you don’t sneak up behind it with a rope, but you decide where they herd is heading and get out in front of them and dig a big hole. Here are my thoughts on where I think the American herd is heading.
Healthcare: This sector has been strong so some may argue it has gone up high enough. But when I look at the size of the growing American population, and the aging of the large baby boom demographic, I only ask myself one question. Will Americans 10 years from now be using more or less healthcare than they use today? The political debate over who will be paying the bill does not concern me. I focus instead on the amount of dollars that the sector will be receiving, and I am very confident our healthcare needs and costs will be growing.
Technology: This sector has been hot for several years and for good reasons. One industry analyst put it in simple terms for investors. He said, “Everything that can be automated, will be automated. In cars, airplanes and dishwashers, the future is mainly about the software.” As I write this column, my little robotic vacuum is making the most beautiful vacuum lines you have ever seen as it carefully circles my chair. Technology has a long way to go to automate everything.
Leisure: This sector encompasses everything that has to do with recreation and vacationing. If you have been on vacation this summer you already know how crowded the hotspots are becoming. The newly retired and financially fat baby boom generation places a lot of value on seeing the world. They love to travel and they love to play. Whether it be cruise lines, hotel chains or theme parks, anything that fills the insatiable need of this generation to get out of the house and play is worth taking a look at.
Consumer Discretionary: This final sector focuses on products that people don’t really need but love to have when they are feeling good financially. Consider how often a package is delivered to your own front door these days, and those of your neighbors, and you will see the power of discretionary spending. Remember, not only are the baby boomers a huge generation, but they have mostly already earned their money, and love to spend it. Retired people don’t lose their jobs in a recession. So discretionary spending by this spend-happy generation is worth looking into.
These are not recommendations to invest but merely ideas to consider as you decide where to place your money. I have always found it best, when the herd is moving, to pay attention to the direction it is heading and get out in front if you can.
Few financial products create more confusion than annuities. These are basically an investment issued by an insurance company and tied to an insurance policy. In some manner, the issuing insurance company takes a risk based on the anticipated lifespan of the person whose life the annuity is tied to (the annuitant). For taking that risk the insurer charges the annuity owner a fee of some kind. They also pay a fee or commission to the agents who sell them.
I have heard salesman tell clients they won’t pay any commissions or fees because the insurance company pays the fees for them. Such claims are usually not the case. Insurance companies are a business that does in fact pay agents to sell their products. But the money for those payments can only come from the customers they serve.
Discussions surrounding annuities can be quite polarizing with often little room for middle ground, much like the current political climate. Some profess that all annuities are bad while others sell them like they are suitable for everyone. In this debate, both sides are being unfair. Once understood, annuities offer benefits that can be a blessing to those who need them and who understand the limitations and costs. But they are certainly not suitable for everyone and must be used judiciously to solve specific financial challenges.
When our office does initial meetings with potential clients, we ask about their entire investing experience and when we get to annuities, we often get a very emotional response. From these personal experiences I have concluded that people who own annuities are unhappy with them and feel they were misled in the sales process. This does not surprise me because there is a huge industry in America that focuses almost exclusively on selling annuities, and I have often seen them presented in ways that focus on their strengths while minimizing their weaknesses.
Confusion surrounding annuities can be avoided since these are highly regulated and the terms of the contract are very specifically spelled out in the paperwork. Although the contracts are not easily understood by most people, individuals can always seek out second opinions from other trusted professionals before making a decision. Unfortunately, too many rely heavily on the advice of the agent making the sale without doing proper outside research. Since annuities may lock your money up for many years, it certainly pays to take a few weeks to understand what you are getting into.
I have seen many people unhappy with their annuities. I have also seen many who bought them for a specific purpose, who understood the limitations and costs, and who were quite pleased with the outcome. In our office we have found them to be especially useful in planning and controlling distributions to heirs. An annuity used properly and in very specific situations can be a great benefit. An annuity used improperly or sold without a clear understanding of its costs and limitations, will likely lead to disappointment.
I love the Disney musical “Newsies.” The movie originally didn’t do too well, but in recent years the world has embraced it with the very popular live Broadway versions.
The story centers on a group of mostly orphaned newsboys who hawk daily papers on the streets of New York. The more experienced “Newsies” teach the younger boys that the secret to selling papers is a great headline, even if you have to just make one up because ultimately, “Newsies gotta sell papers.” One of the newer boys is unhappy with the dishonesty and says to the group leader, “My dad taught me not to lie,” to which the more experienced boy responds, “Well my dad taught me not to starve.” The story is set in the 19th century but not much has changed in the news media.
Over Labor Day weekend I decided to spend some time reviewing the financial headlines for the month of August. Here are some of my favorites: “Dow Plummets,” “Stocks Skid,” “Markets Sharply lower,” “Stocks Crater after Fed Chief Speaks,” “Investors Plow money into Bonds,” and “A Wild month for stocks.” I began wondering if I had missed some major market disaster.
One of my favorite headlines was a picture of a floor trader with his head in his hands and the caption, “Floor trader agonizes as market falls.” Our office got a great laugh out of that one. The guy probably got to bed late and was just wishing his shift would end. I am sure he wasn’t worried about a few points of market movement. But hey! Newsies gotta sell papers!
After reviewing the dismal headlines, I looked at my client accounts and didn’t see anything that even slightly resembled the gloomy picture that was painted. In my conversations with other advisors I didn’t hear of any unusual moves into bonds and we didn’t field any calls all month from panicked investors. I don’t know which “investors” the news people were referring to but they certainly weren’t any that I knew of.
The truth about volatility in the investment markets is that it is normal. In fact, volatility is a necessary part of an efficient market. There has to be push and pull, a give and take, in order for markets to properly adjust. The alternative would be an artificially controlled market, and no one should want that. As the numbers get bigger, ie. DOW 26,000 versus DOW 8,000 just a few years ago, the daily movements will naturally “seem” bigger. On black Monday in 1987 the DOW average fell 508 points or 22%. That would be a nearly 6,000 point drop in today’s numbers. Now that might be something to “agonize” over, and yet we survived it.
So here we are in September and already the gloomy headlines have begun, so hold on to your seats. We could be in for a rough ride. Or perhaps, only those who react emotionally to the dire headlines will be. After all, newsies gotta sell papers.
Launa and I love to take walks along a particular California beach. Ten years ago the hillside adjoining the beach was developed into a premier ocean front neighborhood. Laid out in tiers, the area is a classroom on the value of location in real estate. The lots right on the beach start at $15 million. Just a few feet back on the next tier up for “only” $10 million you can get the same sized lot with a 9,000 foot home sitting on it.
For people who can afford lots along this beach, the cost of building the actual home is insignificant. We enjoy seeing the exotic materials and designs involved in those amazing homes. But building on a beach brings with it many challenges as the moist, salty ocean air that feels so wonderful to human skin, can be very destructive to building materials.
We have watched as the beautifully ornate iron fences and railings in the neighborhood have rusted away in just a couple of years. It seems that almost before the new homes are completed, the iron begins to deteriorate. It amazes us to see ugly, corroding wrought iron work surrounding these $10-30 million dollar homes.
Many of the newest homes in the neighborhood have begun installing glass railings. Glass is not corroded by salty air, so its use makes sense. But glass does not prevent seagulls from leaving their messes and it also attracts salt deposits from the air. One homeowner told me she has to clean her glass railings every few days. But she mentioned it is far less troublesome than maintaining iron in the ocean environment. The fact is, no matter where you live or what you build with, all homes require maintenance.
Last week I met a person who admitted to neglecting his investment portfolio for five years. Investments, like everything else, need maintenance, and some require more than others. A portfolio of high maintenance investments may start off being exactly what you want but keeping it that way requires constant attention and effort. It will need some regular light touch up. Occasionally you might have to get out the financial version of a sandblaster for a major overhaul, or you may even need to tear it down and start over. High maintenance investments might include options, futures, or even individual stocks. As with a beach house, if you are not willing to do the work, do not own the investment.
The investing world invented lower maintenance items for people who prefer a “glass railing” portfolio. Things such as mutual funds, exchange-traded funds, and bonds are some items that might require less maintenance by the owner. They still need regular cleaning (rebalancing), but the overall time commitment should be much less.
A wise person once said, “Never build a house without first considering the cost.” The same principle applies to investing. Do not put together a beautiful “wrought iron” portfolio unless you are prepared for the maintenance that will follow.
This week I am still thinking about the hills I climb and descend on my regular bicycle rides. On my road bike every part is designed to be as light as possible to reduce drag and increase efficiency. One of the heavier items on a bike are the gears. Mine has 16 gears, yet at any given moment I can only use one of them. Those extra 15 add weight, but they are worth carrying along because of the utility they provide. Low gears make possible the climbing of steep hills, while high gears can really get you moving downhill or on a flat road. Each gear has its use and when you need it you are glad you brought it along.
As an investor you have a similar situation. Your portfolio works like a bicycle whose purpose is to get you from one place to another. You want your portfolio to be efficient, not carrying a lot of dead weight to slow you down. The diversified investments in your accounts act like gears on a bicycle. Some are better at making money when stock markets are going up. Small cap growth stocks might be an example of some of these. But when stock markets are going down, the same growth stocks may struggle. For that situation you may prefer to have some value oriented stocks, or income focused investments such as bonds. The markets change regularly, just as the terrain changes continually on a bike ride, so having several gears available for your use can come in handy.
It is not uncommon for me to visit with people who try to create a portfolio with just a couple gears in it. If the markets are climbing, they complain if they have any slow moving bond type investments. But when things are going badly, they wish they didn’t own any growth stocks. They fail to learn what riding a bike has taught me.
My bicycle has a gps which tells me how far I have gone, and at what average speed. Those two numbers are what really matter in tracking my long-term progress. I never worry about how slowly I climb a hill, or how quickly I zoom down the other side, but I focus instead on the final average speed when the ride is through. Though all those extra gears may weigh me down a bit, in the end they provide the results that are important to me by helping make the most of both the hills and the valleys.
When the stock market is hot, don’t complain about your bonds. When markets are falling, don’t regret that you own stocks. Focus instead on having a good mix of investments that can help you both climb the hills and soar through the valleys along the way. Remember to keep your eye on the overall average return those investment gears are working together to obtain for you.
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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