Financial Planning versus Financial Preparedness

This past year I began incorporating financial planning into my practice. For years I had been more of an investment manager and financial advisor but never a planner. To clear up the jargon, an investment manager evaluates and selects securities to construct a portfolio for clients. A financial advisor gives advice on an array of investments and coaches clients through good and bad markets. A financial planner helps individuals set objectives and create a plan to achieve their goals.

In day-to-day life I am not much of a planner. I kind of like to fly by the seat of my pants. When my family travels to a new city, I never map out where we are going or what we are going to visit. I prefer to wander and see where we end up, which usually leads to a fight and the five of us lost in some obscure part of town. Don’t believe me—ask my wife about our trip to Montreal a few years ago.

When it comes to college or “retirement” planning, you can’t really afford to fly by the seat of your pants. You have to save, and you need a plan to manage your assets accordingly. Hoping that you’ll have the funds to pay for Junior’s first year at Michigan is not a good plan. Maybe your daughter surprises you with news that she’s getting married. It can be extremely challenging to fly blind.

My problem with financial planning is the assumptions it makes. We run numbers and scenarios through computer models, and they spit out a plan. Fortunately or unfortunately, life is not like this. Markets don’t go up 5% a year, interest rates go down, you lose your job, Junior decides he wants to go to medical school after he gets his MBA, and the inheritance you think you may receive doesn’t pan out. Mike Tyson said it best, “Everyone has a plan until they get punched in the face.”

Another wise person once said, “He who fails to plan, plans to fail.” The statement easily applies to financial planning, but instead of calling it that, can we call it “financial preparedness”? Planning assumes static inputs with a predictable outcome, but things are never that neat and tidy. I like my new phrase, financial preparedness. Being prepared is being ready for what might occur down the road, nimble enough to turn on a dime, but also honest enough to admit we never know what’s around the corner.

Golden Road

Away from the hamster wheel of noise about Greece and the falling Chinese stock market, I find myself thinking about the Grateful Dead. In case you were away or checked out, the Grateful Dead performed 3 shows last weekend in Chicago commemorating the 50^th anniversary of the band. I was never a Dead Head and never even appreciated their music growing up. I probably was anti-Dead, favoring the music of Rod Stewart, Elton John, and Kiss. Dead Heads were “hippies,” and for some reason that had a bad connotation for me.

As I have grown older and wiser, I have a newfound appreciation for hippies and what they stand for. Believe it or not, having the hippie aura has actually made me a better advisor, and here are some of the reasons why:

• If you think the news and papers were overloaded with stories about Greece, you should have been in my seat. The amount of whitepapers and webinars that hit my inbox was staggering, every money manager espousing the same analysis. Every firm had the same reaction to the action. My inner hippie advised me to tune out and turn on to continuing to live my life the way I have been doing. A pebble on the road is not going to derail me from my own personal financial goals
• When thinking about your financial goals, be a free thinker. Don’t worry about what your neighbor or office mate is doing. Live your life, reject the mainstream, and stay focused on what is important to you and your family.
• Don’t trust the man, the man being conventional Wall Street “wisdom.” Wall Street is not interested in your well-being; Wall Street is interested in its own well-being and how much it can extract from your pocket. Proprietary products, hedge funds, and structured notes are chocked full of hidden costs and fees you would never know about even if you read the myriad of disclosure pages. Keep it organic and simple.
• Caring about investing with companies that make a difference in the environment and workplace is a good thing. Being kind and generous always help. In your financial plan, think about philanthropy. There are great benefits not just in the feeling that giving produces but also possibly tax wise.
• When it comes to financial planning, and I have written about this numerous times, the easiest way to ensure more successful outcomes in the future is to keep your overhead down. Of course it makes sense to save and invest, but if you spend less, be less of a consumer, the better your chances of achieving financial freedom.

I’ll finish by quoting the poet Robert Frost, who I don’t think was a hippie or financial advisor but thought independently:

Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.

Good Morning America

Good morning America how are you, don’t you know I’m your native son . . .

It’s the 4^th of July weekend, the real start to summer. Lazy days, grilling, vacations, catching up on the books you wanted to read over the winter. Soak it up and enjoy. These are the days to remember . . .

I wanted to get a quick post out before the long weekend in celebration of summer and taking time off. According to a survey conducted by Staples Advantage, the business-to-business division of the office supplier Staples, 53% of American workers are burned-out and overworked. What is even more disturbing, according to the same survey, 86% of workers are happy and willing to work for a promotion within their organization despite being burned-out and overworked!

While I don’t dismiss the value of hard work and the importance of putting food on the table for your family, there has to be a balance between work and life and also greater emphasis on valuing what is truly important.

We all probably have different values and thoughts on what we want out of life. I won’t judge and say that one is better than another. But I do know that if you can’t go to work and have fun and find purpose in what you are doing every day, it’s time to rethink what you are doing with your time.

One of my mentors, Ari Weinzweig, has written and lectured extensively about the “energy crisis” in the American workplace. If you are working in an environment that does not provide a financially sound, supportive, sustainable way to be, you either need to foster change or find a workplace that does create positive energy. In order to have the power to create positive outcomes, we must have a stake in the outcomes.

This weekend tune out what doesn’t thrill you, fire up the grill, crack open a few cold ones (whatever your choice), and enjoy the time off with friends and family. Recharge your battery and ponder your own energy crisis at work and how you are going to fix it on Monday morning. (Need a little extra nudge getting to that vacation state of mind? Check out the latest post at Harvard Business Review’s “Work-Life Balance” blog: https://hbr.org/2015/06/get-in-the-right-state-of-mind-for-vacation.)

Have a safe and enjoyable 4^th!

Put Me In Coach

Last weekend I was listening to an interview with the famous golfer Gary Player on local sports talk radio. Player has a new book out, but what caught my attention was that he said he never worked with a coach when he was on the pro circuit. He went on to say that he doesn’t understand why today’s pros have a swing coach, a strength coach, and a nutritionist all on staff. Player feels that if a pro cannot fix his own swing or get in shape, he or she isn’t a top professional.

I couldn’t disagree more. There are very few people who can actually motivate themselves consistently to get better. On top of that, very few of us have the discipline to push ourselves to make that change. To take this even further, I have yet to meet someone who can objectively look at a situation and remove his or her own bias in making a decision or undertaking change. This is why we all need help and why we need coaching.

Take working out or training. You can join a gym, but gyms make their money betting you aren’t going to show up. You sign up after Christmas or before the summer when you need to get back in shape. You go for a week or two, but after that your credit card is billed every month and you are lucky if you show up once a week.

When do you actually show up on a regular basis? When you have hired a trainer/coach. A trainer holds you accountable to show up and do your work out. A trainer pushes you when you don’t want to do that extra burpee or sprint the last 100 feet. Despite what Gary Player thinks, most great athletes have a coach or multiple coaches to push them to be better!

The same could be said for investing and financial planning. Most of it is not rocket science. It’s common sense. The problem is that most of us don’t have the time or discipline to do it. More importantly, we as human beings can’t be objective in looking at our own financial lives. When was the last time you and your partner had an honest conversation about money, values, or retirement?  It’s not the type of conversation that we generally want to have. Americans spend more time planning a one-week vacation each year than looking over their finances—scary!

Last year Vanguard did a study outlining a financial advisor’s value. The company concluded that a good advisor could add 3% net value to returns, half of that coming from behavioral coaching. Investors by nature don’t like to sit still and let their investments work for them. There is a psychological need to move from one investment to another, chasing yesterday’s winner, which inevitably will be tomorrow’s loser. A good advisor/coach keeps his or her clients invested in a properly allocated portfolio according to their individual risk tolerance. Sometimes there is greater value in what you don’t do versus what you do. To quote financier George Soros, “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

We are human beings, which is to say that in much of what we do, we could benefit from a second opinion. If you want to see better results in your golf game, health, or portfolio, it pays to work with a coach.

Your Value Proposition

Some of us hit the wall at different times in life. There is the proverbial wall that one hits during a running race or long bike ride, where you just run out of gas and can’t take another step or push the pedal one more time. Some of us hit the wall when we can’t take doing the same activity or job any longer. I hit the wall hard while working at JPMorgan. Going into work at 277 Park Avenue every morning zapped the life out of me, and I knew I had to make a change. A few weeks ago a good friend and client hit the wall in terms of how he wants his money invested. He no longer wants to invest in companies that negatively impact our environment and/or are involved with the manufacturing of guns or ammunition. A very noble and impactful decision.  

A few years ago it might have been a tall order to fill unless you had a multimillion-dollar portfolio and could hire several money managers to assemble it. According to the Forum for Sustainable Investing, nearly $7 trillion dollars are being invested today in responsible and sustainable investment strategies. The same study also states that nearly $1 out of every $6 is being invested in sustainable or socially responsible securities. Today there are several hundred investment options focused on environmental, social, and corporate governance (ESG) strategies.

The question for investors for many years had been “What do I have to give up in terms of performance to invest in ESG strategies?” There was a time when these investments’ performance lagged, but over the last few years, according to a Calvert Investments study, ESG strategies/securities/investments/portfolios have slightly outperformed the general global stock market. The stronger performance over the past few years may be attributable to energy stocks severely underperforming the general market because of falling oil prices, or could it be attributable to better security selection? Your guess is as good as mine. It is my opinion that today one does not have to sacrifice performance to invest in socially responsible, or “impact,” securities that are more aligned with his or her personal values.

While performance is certainly important and we want our money to grow, investing in ESG strategies has other benefits. Your money can have an impact on how companies act or invest. Your money can help bring about change! Two weeks ago, for example, Norway’s $890 billion government pension fund elected to divest itself from investments related to coal. The New York Times said it was “the biggest institution yet to join a growing international movement to abandon at least some fossil fuel stocks.” The issue of climate change will in the foreseeable future have a very big impact on companies that use or produce large amounts of fossil fuels and potentially on their stocks as well.

If you don’t think that investing in strategies that align with socially responsible values can cause changes in policy, you need not look further than the divestment efforts in the 1980s that eventually led to the end of apartheid in South Africa. Institutions and endowments can have a strong say in the way governments and businesses operate.

I hit the wall in terms of my own investment style 15 years ago. I realized that trying to outsmart the stock market was a loser’s game. If you have never read Burton Malkiel’s book, A Random Walk Down Wall Street, read it now—it is a great starting point to understand the fruitless exercise of picking stocks and trying to beat the market on a consistent basis. Whatever your values are, don’t be afraid to express them in terms of how you want your money invested. After all, it is your money.

Investing in the stock market involves gains and losses and may not be suitable for all investors. The investment’s socially responsible focus may limit the investment options available to the investment and may result in returns lower than those from investments not subject to such investment considerations

The Joy of Playing Small Ball

I am not what you would call an avid baseball fan. I cheer for the New York Mets and Detroit Tigers for sentimental reasons, not because I love the game. I do miss the summer nights, driving around Michigan listening to Ernie Harwell on the radio and enjoying the best ballpark hot dogs ever at the original Tiger Stadium. Even though it was a dump, part of me misses Shea Stadium where the Mets played until they moved to Citi Field a few years ago. 

Talking baseball
 

There is a term in baseball called “small ball” that I appreciate. Small ball essentially is playing to manufacture runs. The idea is to get runners on base, advance them and get them home to score. In small ball you don’t rely on walks or home runs, it’s about taking control of the game, getting runners in position to be successful.

When I speak with clients, most of them are overwhelmed with all the stuff we have to do and remember. There are forms, login usernames and passwords, emails upon emails, bills to pay, and investment accounts to review. It seems that if you throw one more thing on the proverbial plate to do, you will explode.

This is the time to play small ball. Take control of the situation, simplify your activities and hand off what you can hand off. There are only so many waking hours in the day and you don’t want to spend it on the phone with a help desk in Manila.

I am not an organization expert but I find short cuts that work for me. Start with unsubscribing from all of those email distribution lists. That should cut the clutter in your inbox in half. Create folders and rules so that certain emails go into folders that you can review at your convenience.  Set up bills to be paid from auto debit. Put as many bills as possible to be paid on your credit card. Warning: only do this if you are paying off your credit card bill each month. You don’t want to ring up additional interest charges.

When it comes to investing, there are do-it-yourselfers and delegators. If you have the time, expertise, and ability to remove yourself from making emotionally charged decisions, by all means do it yourself. Most of us don’t have the time, expertise, or temperament. A good advisor more than pays for themselves by being tax efficient, harvesting tax losses each year, rebalancing, and keeping you invested when markets get ugly. Fees may be less if you do it yourself, but when you measure what your time and good advice is worth, I think you’ll find delegating to an advisor is a smart choice. 

Returning to baseball for a moment, the sacrifice fly ball is a great example of small ball. A sacrifice fly ball is when the batter will hit the ball into the outfield to allow a runner to tag up and advance the base he is on. The batter in essence is giving up his chance of getting a hit for the sake of advancing the runner. Giving up something, or simplifying a process for your greater good, is playing small ball.  The next time you are feeling overwhelmed with all that you have to do, take control of it, and play small ball.

Lists

One of my favorite movies is High Fidelity starring John Cusack.  The movie is based on the book by Nick Hornby, which I am ashamed to admit I never read. Cusack plays the owner of a record shop who is an obsessive list maker. Lists are great to stay organized and keep track of things to do: groceries, packing, or items that need to be accomplished at the office the next morning. Lists are also a great way of ranking or prioritizing what is most important to us.

I spend a lot of my time getting to know what is important to clients and potential new clients. What makes then tick, what keeps them up at night or, even, what is their favorite cocktail? It recently dawned on me to ask my clients, how well do you know me? Below are a few lists of some of my favorite things. Let me know what you think.

Favorite Movie

1.       Rocky

2.       Dog Day Afternoon

3.       American Beauty

4.       Big Chill

5.       Annie Hall

Favorite Song

1.       Can’t you hear me knocking

2.       Roxanne

3.       Smells Like Teen Spirit

4.       Thunder Road

5.       Levon

Favorite Band

1.       Rolling Stones

2.       Bruce Springsteen and the E Street Band

3.       Bob Marley and the Wailers

4.       The Police

5.       Nirvana

Favorite Food

1.       Veal Parmigiana

Favorite Wine Region

1.       Bordeaux

Favorite Whiskey

1.       Laphroaig

 

Favorite Team Logo

1.       Chicago Blackhawks

2.       Baltimore Orioles

3.       Detroit Tigers

Favorite Football Helmet

1.       Michigan Wolverines

Favorite Book

1.       Catcher in the Rye

Favorite Writer

1.       Michael Lewis

Favorite Actor

1.       Robert Redford

2.       George Clooney

3.       Paul Newman

Favorite Actress

1.       Julianne Moore

Favorite TV Show

1.       Friday Night Lights

2.       Sopranos

3.       St. Elsewhere

4.       Curb Your Enthusiasm

5.       Cheers

Favorite Athlete

1.       John McEnroe

2.       Andre Agassi

3.       Anthony Carter

4.       Michael Jordan

5.       Walt “Clyde” Frazier

6.       Bo Jackson