This week I came across the original contractor’s design for our yard layout. The landscape architect really took his job seriously as I counted over 300 bushes and trees in his plan. At the time I thought he did a pretty good job and as we were moving in couldn’t help but be pleased with our beautiful yard.
What the designer failed to mention was the high level of maintenance the yard would require. For example, we planted over 30 palm trees. I love palm trees and just assumed they would be low maintenance. In the first few years I learned those palms needed more maintenance than our other trees, and the darned things just kept getting taller. I must say I wasn’t too disappointed when a very cold winter killed several of them. In fact, the following spring we pulled out a dozen more just to lighten our load.
We also had over 40 beautiful red rose bushes. Their color really made the yard “pop,” but we quickly discovered that we weren’t the only ones who loved them. Thousands of aphids found those roses so attractive every year that we finally gave in and pulled them out.
As I walked around the house this week I noticed how dramatically the landscape had changed from our original design. Bad weather, pests, plants overgrowing their space, and a desire to reduce maintenance all led to a current yard that is much simpler than the one we began with. Yet we love it even more. It turns out, in landscaping, more is not always better.
I compare my yard experience with the process by which people seek to build and maintain an investment portfolio. Most begin with exotic plans but as time goes by they find the need to tailor those plans to the daily realities of life. They discover that investing is as much about lifestyle and peace of mind as it is about rate of return. Some investments wind up being just too much work or stress, so they seek to simplify. Often if you trim things back and thin others out, you wind up with a more manageable situation that is not only simpler, but often better than you started with.
Just as I believe investors should not take more risk than their situation requires of them, neither should they fill their portfolio with more individual investments than is necessary. Having too much not only leads to more work but it can also result in investment overlap which complicates risk management. Red roses may be beautiful but my yard today is plenty beautiful without them. Likewise, investors should not feel they are missing out if they don’t own all the current hot positions. Review your portfolio regularly and don’t hesitate to thin it down if it has become overgrown with positions that require more work but don’t really add any extra value. In investing, as with landscaping, more is not always better, and it can often be worse.
Many who have come into my office have asked about a small green sweater that is framed and hanging on my wall. It seems a strange item for a financial planning firm, but the story behind it plays a significant role in my philosophy towards investing.
In 1921 my grandpa Jones opened a small knitting mill in Los Angeles. From the beginning he decided to run his little company based on two very simple principles. First- Be fair and honest with customers and employees. Second - Only produce the highest quality clothing, made from 100% pure wool.
The early years were not easy. Among other things was stiff competition from several other mills in the area that had chosen to use “fillers” in their wool. By mixing foreign material in the wool, the competition could keep costs lower, yet under regulations at the time they could still claim to be pure wool. This concerned Grandpa but he pressed forward with a firm determination to follow his business plan. When people bought a “Jonesknit” sweater, he wanted them to know they could trust the product to be of the highest quality.
The years went by and Jonesknit, despite receiving numerous awards for the quality of its sweaters, continued to struggle in a competitive world where price often had the final say. Suddenly, in 1929 the Great Depression struck and the garment industry was particularly hard-hit.
Amazingly, while competitors were shutting down, the sales of Grandpa’s sweaters grew. Public schools, large organizations and even the U.S. Postal service began to buy almost exclusively from Jonesknit. Not only were there no layoffs, but new people were hired and Grandpa was able to continue giving his employees regular raises. He learned that when times get tough, people can’t afford to waste their money on junk. They look for quality. Grandpas focus on quality resulted in his family and employees being cared for in comfort while so many were suffering during the depression.
The small green cardigan Jonesknit sweater in my office was given to me by my grandpa when I was eight years old. I admit to being pretty disappointed at the time, having really wanted another toy airplane that Christmas. But I have since come to appreciate the valuable message knitted into that sweater. During those times when the investing world is struggling and I am searching for appropriate investments for my clients, I glance over at that sweater and remember the lessons learned from grandpa Jones. “Focus on quality,” I remind myself, as those companies who do so are most likely to survive and thrive. I call it my Green Sweater principle and it has served me well for many years.
As the investing markets enter this current season of heightened concern and increased volatility, you can be sure I will be paying particular attention to the lessons of that old green Jonesknit sweater hanging on my wall.
I attended an airplane convention a couple weeks back and, as usual, I looked for the economic aspect of all I saw. Airplanes are expensive machines and the revenue numbers from the manufacturers can be a strong indicator of our economy. When times are bad, sales can be dismal since businesses not only can’t afford financially to upgrade their fleets, but they can’t afford it politically either. If you think back to the economic crisis of 2008, you will remember the investor outcry at companies whose executives were hopping around the country in nice corporate jets while revenues were falling. In an effort to calm the public outrage, we began to see a parade of CEOs openly flying, not only on commercial airplanes, but, heaven forbid, flying in coach.
At the same time the used market for airplanes was so flooded from companies dumping their jets, that I would be a rich person today if I had picked up some of those beautiful birds and just put them into storage for a couple of years.
Ten years later aircraft sales are booming and 2018 is shaping up to be one of the best in history for several manufacturers. Piper aircraft, nearly bankrupt a few years ago is now reporting record sales with back orders of some of their most popular models well into 2021. Interestingly, many Piper trainer airplanes are heading to China, a country just getting the taste of economic prosperity. For those of you worried about a trade war with China, keep in mind that the newfound love for limited capitalism in that country is not something they are going to want to walk away from anytime soon. I suspect both sides will quickly find a way to solve their differences.
The other big point that came from the convention was the update on the use of 3D printers. What was science fiction a few years ago has now become an economic reality that could dramatically improve corporate efficiency and profits. For example, manufacturers are now capable of printing many non-structural airplane parts. A simple landing light cover for my plane, a clear piece of plastic, currently costs hundreds of dollars. The high price results from the cost of producing and storing a part for which there is a relatively small market. With 3D printing technology that same part can now be printed on demand for less than $10. The efficiency of this system translated over thousands of other parts will dramatically reduce the costs to the manufacturer and to owners, resulting in a more efficient and profitable market for everyone.
Corporations tell us on a regular basis how they feel about the future when they give forward guidance, but sometimes an even better economic indicator is to watch their actions. People tend to vote with their wallet and companies and individuals spending record amounts on new aircraft is another sign to me that corporate America is feeling pretty good about itself right now.
We were on the mountain this week and Jayden and his friend wanted to go for an ATV ride. It was late afternoon so I let them go on condition that they were back by dark. Later on, as the sky darkened I was wondering when the boys might get home and realized I had given them bad advice. By telling them to be home by dark, I hadn’t allowed any room for error. There are lots of ways to run into trouble on the mountain, from a serious accident to a less serious mechanical breakdown, or simply getting lost. Even the most experienced riders can get turned around in the forest. By giving them instructions to be home by dark, I didn’t leave any room to go looking for them in the event they failed to show up. There is no cell service on the trails and once it gets dark, finding someone can be very difficult. Needless to say, we were glad to see them pull in just as the last light was disappearing.
Investors often come to me with an odd request. They tell me that since the markets are pretty good they want me to keep their investments overly aggressive but, to move them to safety if things change. It would be great if that were possible but the reality is, when the markets turn against you there isn’t always a lot of warning. Sometimes by the time the markets go dark, as it were, it’s too late to do anything about it. This is one of the reasons I emphasize taking a more balanced approach to investing. In a sense, it is like giving you room for error. A balanced portfolio, by design, may have some investments that are doing very well and others that may not be doing quite so well. Then the investments may switch places. The goal is to get a favorable rate of return overall, while not exposing yourself to more risk than is reasonable. It is a trade-off.
Since I didn’t give the boys any room for error, I realized that I had exposed them to too much risk. A simple flat tire could have become a major problem given the difficulty of finding help in the dark. By asking them to be home an hour before dark they would have had a little less time for fun, or perhaps a little less return as it relates to investing, but the price would have been worth the reduced risk. It has been my experience that trading off a little return in exchange for less risk can result in a more positive investing experience over time. As with four wheeling, a flat tire eventually will happen and when it does you will be glad you saved that extra hour of sunlight to help you find a solution.
I went for a lovely bike ride on one of my favorite trails this week. It is a paved city trail that follows a river for about 11 miles each way. On this particular day I felt like I was really on top of my game. I seemed to have unlimited energy as I clipped along at what seemed like a record pace. I was giving myself all kinds of pats on the back about how healthy I must be.
As I came to the end of the river trail, I took a quick drink of water and turned to head back home along the same route. Immediately I found myself struggling to get any speed and at first couldn’t figure out what the problem was until I realized that there was a pretty stiff wind blowing in my face. I remember thinking, “Where did that wind come from all of a sudden?”
As I struggled against that headwind all the way back home I had plenty of time to think about how little credit I gave the wind when it was pushing me along, but how much I blamed the same wind when it made my ride tough.
I compared this experience to my career as a financial advisor. I thought about all the times when economic tailwinds would push investors along, as in the current growth period. How quick people are to take credit for their investing prowess when they have a tailwind. I then thought about the economic crashes I have seen in my life and likewise, how quick people were to complain and assign blame to anything and everything except themselves when they face a headwind.
As I continued riding, and grumbling to myself about the wind, I thought about why it was that I rode in the first place. Initially, I started because cycling is good exercise but I also ride because I love the beauty of the outdoors. I realized that the headwinds, though uncomfortable, were not preventing me from fulfilling my riding goals. In fact, they were actually helping me. I was getting a good workout and was still able to enjoy the beautiful scenery, even a bit more with my slower speed.
As investors, we have a tendency to curse the headwinds while giving little credit to the tailwinds, yet we can control neither. The happiest investors I know take care of the things they can control, try not to worry too much about what they can’t control, and most importantly, take time to enjoy the journey along the way. Enjoy the tailwinds and be grateful for them. Endure the headwinds and don’t get discouraged by them. And most importantly, make sure you enjoy the ride.
While closing the hangar door after a trip I saw a little mouse run under at the last minute. I know the little guy was thinking that given the summer heat, life inside an air conditioned hangar was looking like a great option. What he didn’t realize was that we hangar owners don’t care much for mice, nothing personal, but they get inside wheel wells and crawl through engine compartments and can really make a big mess. So like the other hangars around me, every corner of my hangar contains a block of mouse poison that would surely ruin this little guy’s evening. So as he ran by I looked at him and said out loud, “Hey little buddy, this is not a good place for you to be. Get out while you can.”
Sadly, he did not heed my advice and the next time I visited the hangar we met again under different circumstances. It was just a mouse and nobody really likes mice, but still I felt badly for him. He wasn’t meaning any harm, just looking for safe place to live and a decent meal. He got neither. A hangar is a great place for airplanes, and I can’t think of many places I would rather be, but it’s a really bad place for a hungry mouse.
I thought about that little mouse while speaking with an individual about an investment they purchased several years ago. At that time the investing world was challenging, fear levels were high, and the heat of the day was leading many investors to seek shelter. This person had found just such a place. A place where they hoped to find a little safety for their money, and it seems there may have even been the promise of a good meal as well.
As time went by they came to realize that the safe haven they sought was not much different than my hangar was to the mouse. It seemed nice and safe at first but soon little financial traps began to appear. There were unexpected fees, restrictions on growth, investment limitations, and performance below what might have been suggested or hoped for. This investor realized that in attempting to escape the financial heat, they had gotten into a situation where their investments were simply not doing what they needed them to do, so they made the decision to get out.
Many make the decision to flee to a safe place when they feel fear, only to learn later that safety can be a relative word and often comes at an unexpected cost. If you have purchased investments that are no longer fulfilling your needs, or maybe weren’t even good to begin with, don’t be ashamed or afraid to make a change and get out, while you still can. You certainly don’t want to wind up like my little mouse.
On September 11th, 2012 an automated text message from the mayor of Santa Clara, Utah warned that the dam above my house was about to break. I raced home but before arriving received a call from my neighbor. He was normally quite a jokester but there was no joking in his voice when he said that a wall of water had just crashed through my house. “You don’t want to see this.” he said. And he was right.
Water is an unpredictable thing. The flood had come barreling down the street, crossed a field, and crashed through our French doors filling our house with over three feet of mud. It was as if the flood had singled us out for destruction. As bad as it looked, we had no idea it would take 18 months and over $200,000 to repair our property. As Launa and I surveyed the terrible scene I said, “What are we going to do?” She responded, “Start shoveling.”
We learned from our own personal 9/11 that sometimes bad things just happen. Despite all your best efforts, you can’t always predict or prevent disaster. I have helped many people through personal financial disasters in their lives. Job losses, medical emergencies, divorce, criminal activity, national economic collapse and many other unexpected disasters can put a real squeeze on family finances. There are things that can be done to prepare, but there is never a guarantee that your preparation will be enough. Life doesn’t really offer many real guarantees. I have seen people do everything seemingly right and still find themselves looking at a flooded life wondering if they will ever recover.
The thing to remember about proper financial preparation is that it’s like living a healthy lifestyle. You may eat properly and exercise daily your whole life, and still wind up with a heart attack before age 60. That’s just the way life is. But those first 60 years would have been much more enjoyable for having lived so well. In similar fashion, being financially responsible is not just about hoping to retire comfortably in your old age, but about living better in your younger years. It’s about having more peace and less stress in your life today, even if all your efforts can’t guarantee what might happen tomorrow. Doing what’s right today brings its own reward right now, and will also make whatever comes tomorrow easier to handle.
I may be a little sentimental but I still have several shovels in my hangar covered with Santa Clara red mud. I keep them as a reminder that despite our best efforts, disasters can still happen. They also remind me that our preparation before the flood made the disaster much more bearable. We can’t stop the floods of life from coming, but we can live better until they do, and get through them easier if we are prepared. Financially speaking, doing what is right today is always a good idea.
I recently attended an investing conference where an economist gave a speech entitled, “It doesn’t get any better than this.” He pointed out all the great economic news that seems to be the standard for the past couple of years.
One of the items was the very low unemployment rate. According to economists, our country is currently operating at full employment, meaning there are few employees left to hire. Of course there are always unique situations based on geography and training etc., but for the most part, we are currently in a worker shortage. Anyone who owns a company with job openings knows that the labor market is very tight.
The speaker went on to list the other areas where economically, we seem to be at the top of our game. He compared the economy to a sports car racing down the road at full speed with the pedal to the floor. It soon became very clear what he was getting at. “If it doesn’t get any better, then what might happen?” How can companies keep growing if they can’t add staff? How can people who are already spending at record levels, spend more? How can families who are starting again to max out their credit lines, borrow more? How can businesses that are already operating at peak efficiency, become more efficient? How is it possible for our race car with the pedal already on the floor, to go any faster?
And so we potentially have another financial storm on the horizon but a very odd storm indeed. This is not a storm of disaster. This is a financial storm created by success. In short, the economy is so strong, corporate profits are so good, and unemployment is so low, that it is becoming more difficult to see where the next phase of growth will come from.
Investors don’t care as much for what is going on right now as they do about how things will be six months to a year from now. They want and need to see a potential for growth.
I feel confident that we are not at the end of the economic upcycle. But for reasons mentioned above, I think there is some risk that our meteoric rise might slow down. Potential things on the horizon that could continue to create growth would be the effects of the tax cuts, which really start to kick in next year. Increased efficiency could allow businesses to grow without having to add significantly to their workforce. Favorable trade deals that benefit American companies would help. And continued reduction in regulations that impact businesses. All of these have the potential to add more fuel to the economy.
I believe we can keep this growth going. I believe we still have some good times in front of us, but we must be increasingly aware that the pathway may start getting a little more difficult.
Years ago I decided to participate in an investing competition sponsored by one of the leading financial firms. The rules were pretty simple. You were given $250,000 in pretend money that you could invest and at the end of 90 days whoever had the most money won. It sounded like a fun idea so I signed up. I soon placed my first trades and was off and running.
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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