Thoughts on a Rough Year

Summary:

It’s been a very rough year for everyone.  The purpose of this article is not to
trivialize the pain that many have suffered and continue to suffer. Nor to any
manner imply that recent economic events could have been anticipated or planned
around. Recognizing this, and that hindsight is always 20-20, lessons can be
learned from the carnage. Although the observations following are not profound,
and many are quite simplistic, they are drawn from problems others have
experienced, and can hopefully provide some relevant ideas.

■ Time Horizons.

Too many investors forgot
the concept of time and accepted asset allocations that were out of sync with
the time frame that was appropriate for them. Yes, asset allocation can reduce
risk and increase return, but it’s was never intended as a two dimensional
decision. The almost mechanistic application of what some advisers passed off
as investment planning too often ignored the investor’s time horizon. This same
essential lesson is now being ignored by investors again. Some investors have
abandoned equities because of the risk they now associate with them. That
decision should consider the investment time horizon. Just as many investors
were hurt by assuming too long a time horizon, many will be hurt in future
years from now ignoring the lengthy time horizon they have.

■ It’s Not One Investment Pot.

One lesson from the
carnage of the 2008 meltdown seems to be that too many investors, or their
advisers, viewed the entirety of their investment assets as a single pot for
asset allocation purposes. It was not uncommon for many investors to have a
financial planner run a fairly boilerplate financial analysis and come up with
an allocation that would then be applied to the investors overall portfolio.
This was always too simplistic an approach. Assume that your overall allocation
was 60% stock: 40% bonds. If you have a college fund for your children, and
have a child in college and one two years from college, an allocation to cash
and near cash investments, such as laddered CDs and money market funds, might
be appropriate. Your rainy day money to get you through a job layoff, health
emergency, and so forth could be pure cash. Saving for the purchase of a
vacation home five years out, would warrant a less aggressive allocation
because of the limited time duration, but certainly not the allocation to cash
of the college or rainy day funds. If your remaining portfolio is $10 million
and you’re spending about $350,000/year. $8 million of this portion of your
portfolio might be used to support your expenses assuming a withdrawal rate of
a bit over 4%/year. The remainder of your portfolio may in fact be funds almost
assuredly being held to bequeath and have a much longer time horizon. Thus,
breaking up your overall portfolio into separate pots for different purposes
might not only yield a much more appropriate asset allocation for each major
objective, but will better reflect the time horizon and risk each “pot” should
bear [pun intended].  Does the
hammering your portfolio took in 2008 undermine the integrity of asset
allocation theory? No. But maybe the application of the theory deserves a more
carefully crafted approach then many had used.

■ Budget is not a Four Letter Word.

You’re rich, you don’t
need to budget! Wrong. Sorry, budgets are for everyone, even the wealthiest.
The following scenario has been replayed too many times. A successful
entrepreneur sales the family business for far more than imagined. The family
is on easy street. Money is no object. Or is it. The family adjusts its
lifestyle accordingly, and its’ spending grows to $750,000/year. While the $10
million net of tax you pocketed on the business might feel substantial, if you’re
spending 7.5% on you investment assets (even forgetting the recent market
meltdown) unless you quite old or infirm, you’ll long outlive your money. Do
some simple math. Put together a balance sheet. Subtract off all the “B’s”
bungalow, boat, and bling. What’s left is your investment assets. Multiply by
5%. If you’re spending more, you have a definite problem. If you want real
assurance you won’t outlive your money, your spending probably should be closer
to 3.5%. Its not that wealth cannot enable you to avoid the unpleasantness of
budgeting, it can, but only if your spending is within reason of your asset
base. Market meltdown or not, too many wealthy investors simply don’t control
the relationship of their spending to their investable wealth. Read The
Millionaire Next Door (Stanley and Danko). The surest way to become a
millionaire is to live below your means. The surest way to fall from the ranks
of the wealthy to the middle class (other than having invested with Madoff) is
to spend well beyond your means. Wealth, and the status it supposedly brings,
are seductive. It is as easy, as it is dangerous to your financial health, to
be lured into excessive spending. The next few suggestions will help.

■ Annual Meetings are Vital.

To assure the success of
your financial, estate, insurance and other planning you need to meet with your
advisers at least annually. Meeting with your wealth manager quarterly is a
prudent step. Meeting with your accountant to review and sign your tax return
is also advisable. But an annual meeting of all your advisers and key family
members is crucial and the above don’t substitute for it. Your annual review
can range from a large board meeting spanning an entire day, or a mere hour
long consultation with your estate planner who sequential calls your other
advisers, depending on your budget and the complexity of your situation. The
annual meeting will assure, if properly done (see below), that the expertise of
each of your advisers is marshaled for your best interest. An annual review
assures that no one looses site of the “big picture” of your planning. This is
especially important during tumultuous times.

■ Coordinate your Adviser Team.

Too many people are
realizing that investment, business, spending and other decisions were not made
optimally. But many of those people did not have all of their key advisers:
accountant, estate planner, business attorney, insurance consultant, wealth
manager, trust officer, etc. coordinated and fully informed. A team approach
can help identify gaps in planning, an adviser who is not following through,
miscommunications between advisers that can result in duplication of efforts on
your dime, or worse, dropped balls. To succeed, your advisers should work in
consort. Backstabbing or one-upmanship don’t help you. Foster an atmosphere
that welcomes identification of opportunities for improvement, and even
mistakes. If the first thing that happens when a mistake is identified is one
adviser blaming another (rightfully or wrongly), you loose. Be certain each
adviser has the opportunity to be heard and voice their concerns. Don’t let
your longest, or loudest, adviser dominate. Typically one of your advisers
assumes the quarterback role. Be certain it is clear to everyone who it is, and
then be sure to give the quarterback the authority to do what he or she
believes needs to be done to protect you. Calling your estate planner your
quarterback and not providing her with the annual meetings to keep current of
your affairs, or leaving her off key memorandum from your other advisers, will
never work.

■ Your Accountant is more than a Bean Counter.

Use your accountant as
more than a bookkeeper and tax return preparer.  Without intent to second guess the many shrewd investors
taken in by histories biggest Ponzi scheme, your accountant might well have identified
some concerns if you brought a proposed investment with Madoff to your annual
advisory meeting. Your accountant might of raised concerns over the funds use
of a small accounting firm, in a small town (New City, New York), operating
from a 13 x 18 foot storefront office between a pediatrician’s office and
another medical office. Your accountant might have determined that the auditor
had not had a peer review since 1993. While this is all past history, using
each of your advisers’ abilities to the fullest, in the context of a pro-active
and collegial team, might help you avoid the next Madoff, or other pitfalls.

■ The Key Planning Question Too Many Forgot.

“What if”. Simple,
obvious, almost trite, but that is the key to all planning. “What if”. Too many
people just stopped asking enough “what if” questions in their planning. Let’s
leave aside the market meltdown. “What if” you were disabled tomorrow and
couldn’t work again. “What if” you were diagnosed with a debilitating, but not
terminal disease, that would prevent you from working and increase your costs
of daily living substantially? These are not farfetched or unreasonable
questions. Millions of people face just such tough news every year. What if you
were hit by a major lawsuit, one that had nothing to do with your work, perhaps
a colleague stabbed you in the back by filing an incorrect document and setting
it up to look as if you had done it. Your savings and career could be
jeopardized. If you had asked these unpleasant but not implausible “what if”
questions would you have fared differently through the economic turmoil?

■ Count Your Blessings.

“…Count your many blessings Money cannot
buy…” (Johnson Oatman, Jr.). Focus on what is really important. Keep your
perspective.  It will help you get
through the current economic problems with less pain. It will help you make
better decisions going forward.