Monday, April 21, 2008

Private Client Commentary - conversation

Dear Clients,
Last week we saw the stock market stage an impressive advance. While I

Thursday, April 10, 2008

Tuesday, April 1, 2008

Private Client Commentary - investor personalities

Dear Clients,
For this commentary, I thought we'd take a break from investment topics and take a look at the investor. Hope you enjoy it.
Take care,

What's your mentality, your personality if you will, when it comes to your finances? Having spent the last couple of decades working with individuals in relation to their money, I have a few observations I'd like to share with you.
For starters, it almost goes without saying that money holds a very high position on most people's list of priorities. Many would profess however that, at best, it comes in fourth behind faith, family and contribution to their community. And I wouldn't dispute that for a moment, but this number four priority can lead to serious stress for some people.
At the two extremes, we have what we call the scarcity and abundance mentalities. Over the years I've counseled a number of individuals who I'd consider scarcity minded. These folks are great people; nice, humble and very conservative (financially speaking). However, they can be quite anxious when it comes to money. They may fear they won't have enough to retire. Or, once retired, they fear their money will run out before their bodies do. Many of them (not all) grew up in a financially challenged environment, where their association with money was one of stress and worry. They may have watched their parents worry, complain and even argue about what they felt they lacked materially. I have worked with scarcity minded people who have enviable fortunes (from years of saving diligently and spending minimally), but live like they're just getting by. They clip coupons, live in modest (paid for) homes, keep the thermostat at 84 in the summer, 64 in the winter, take modest vacations, if at all, drive nice full sized cars they paid cash for 11 years ago, and they can worry intensely when the stock market goes down (even though they usually have only modest exposure to stocks). These wonderful soles will die rich (having never lived rich - financially speaking), and leave wealthy heirs behind. For the scarcity minded investor, a conservative to moderate risk asset allocation strategy makes the most sense. These individuals tend to feel real pain when the market heads south (notice I said when), and left to their own devices, many would become the typical investor who, long-term, usually earns a much lower return on his or her stocks than the market indices would suggest. They would likely sell when things get scary, and only buy when they're sure it's safe - which is usually after the market's been going up for a while (sell low, buy high). Their emotional intensity is usually higher during down markets than up markets. In essence, the fear or anxiety they feel when stock prices decline is much more pronounced than the positive sensations they experience when stocks rise. It is highly unlikely that these investors will get into trouble by taking more income than their portfolio can support.
At the other extreme we have the abundance mentality. The abundant minded may also be nice, humble and even conservative in many ways. But this group doesn't seem to experience the kind of anxiety around money that many of the scarcity minded seem to. They believe they'll always have plenty. Many of them (not all) grew up in an environment where money, even when it was scarce, was not a topic that provoked stress and worry in their households. They're more likely to live lavishly - name brands, big homes with big mortgages, they keep the thermostat at 70 in the summer, 70 in the winter, take fabulous vacations, trade in their leased vehicle every three years, and worry very little when the stock market dips. These folks live rich lives (financially speaking for sure), and may very well die rich. A few however tell us that their ultimate goal is to spend their last dime on their death bed (a tough one for us to time by the way). Left to their own devices, they would stand a good chance of earning market returns on their stock portfolios. This is due to the fact that money doesn't scare them and they are therefore less apt to make emotionally driven investment decisions, which is a good thing since they need to maintain portfolios that can keep up with their lifestyles.
I guess I should also touch on another group we, as advisors, rarely see. This third group is tough to name since, in a sense, they seem to possess both abundance and scarcity minded traits. But rather than falling somewhere between, they live beyond either extreme (financially speaking). They're not likely to work with investment advisors, because there aren't any investments to seek advice on. They're abundant minded in a sense, since they have no problem spending money. But unfortunately, they tend to spend beyond their means, seemingly blind to their lack of abundance. So we could label them "abundant blinded". But, like the scarcity minded, I imagine they feel intense stress around money (for good reason), but unfortunately, acquiring new things is how they find temporary relief from their woes - which of course serves only to intensify their stress. So could we label this group the "scarcity blinded"? In either event, these are no doubt some (not all perhaps) of the folks we're hearing so much about in the news these days - the ones who financed expensive homes with interest only adjustable rate mortgages that blew up in their faces when their rates were adjusted up and their home values came down (as the real estate bubble began to burst). While we would never wish this on anybody, in our system, they will survive, and many will look back and see their experience as a blessing in disguise, the great turning point, where they were forced to look inside and make necessary changes in how they approach their lives financially.
So there you have it, the three extremes - keep in mind, these are extremes. We have found that most individuals (our clients at least) fall somewhere between the scarcity and abundance mentalities. They may feel anxiety when they read the headlines during bear markets (which is perfectly normal), but they're not likely to react and make potentially big (emotionally driven) investment mistakes.
As you've experienced, we spend a lot of time and energy helping our clients maintain what we believe is a healthy perspective on the financial realities of our world today. And we will certainly continue to walk you through the ups and downs to come. For yourself however, the next time you feel fear or anxiety as it relates to your money, take a look at your financial reality (give us a call if you need help with this) and consider whether your worry is based on the reality of your situation today, and, if not, ask yourself if you're not perhaps a little pre-wired to worry. If you can relate, who knows, maybe this insight will alleviate some of your stress. On the other hand, if you never worry about money, but wonder how you're going to pay off the VISA after booking the four week African photo safari, and tell yourself - "it's okay, we'll just hit the home equity line of credit, or skip our quarterly estimated tax payment in June, or, better yet, we'll just pull it out of our retirement plan like we did for the six week Mediterranean cruise we took all the kids on last year", ............ WE NEED TO TALK!!