Category: Wealth

I’ve blogged about fear’s influence on the decisions which individual investors often make, prompting them to sell when an issue is falling or buy when a stock is already near its peak.

It’s easy to say “stay the course” or “the market is just doing what it does.” But fear is not a light switch, something easily turned off. I reassure my clients by sharing with them my approach of strategic wealth management, which rests on three pillars:

•   Real diversity of investments
•   A safety net of bonds and cash, and
•   Buying on weakness and selling on strength.

Like the analogy of the three-legged stool, each of my three pillars is critical to making the plans I enact for protecting and increasing my clients’ wealth “stand up.” I write much more about each in my book, “You’re Retired! Now What?” But here’s an overview:

 

Pillar #1: Real diversity of investments

I often structure portfolios with a combination of large, mid, and small-cap equities for long-term growth; bonds for potential income; and liquid assets—such as money markets, cash, and short-term treasuries—to meet more immediate expenses and income needs. 

Experience has convinced me that these can provide the most diversity when designing portfolios to help protect, grow, and distribute the wealth my clients will count on for retirement, and for the fiscal legacies (estates) they’ll leave behind. 

Equities offer real opportunity for growth. Bonds offer higher yields, but fluctuate in value. Cash, meanwhile, only fluctuates in relative value; its greatest strength is its stability.

 

Pillar #2: A safety net of bonds and cash

The fear I mentioned at the top of this post is real. 

Fanned by talking heads at the height of market corrections, downturns, or outright crashes, such fear has led some of my best clients to pull out of investments which, over the next weeks and months, have exceeded their price prior to that down day.

That’s what fear does—if we allow it to.

Fortunately, the vast majority of my clients understand that a reserve of four to five years in non-equity investments is their safety net. It also allows the final pillar of my approach to strategic wealth management to play its role: building wealth.

 

Pillar #3: Buy on weakness, sell on strength

When you buy a stock near its historic price peak (typically for fear of missing out), you take a big chance: that it will go higher still. Similarly, when a stock you own is falling but its fundamentals are strong, selling is the opposite of what you should do. 

The prudence of buying and selling at the right price and time extends beyond individual equities.

Through my broker/dealer, I offer a discounted class of mutual funds to my clients, at pricing that was once available only to large institutions. These funds are actively managed, and I add a further layer of management by watching the wider trends, and buying and selling the funds themselves based on what I see—and what more than 30 years in this business has taught me.

Strategic wealth management recognizes when an investment is at a place to take profits, and moves them into another that’s poised for growth.

These three pillars make doing so possible.

There’s an assumption among the general public that, upon attaining a certain level of wealth (don’t ask me for numbers, because no one seems to know), they and their progeny are what is popularly referred to as “set for life.” 

Hogwash. If anything, wealthy people are more susceptible to losing substantial portions of their assets specifically because of their wealth. 

As one accumulates assets over time, the titling (ownership) of those assets is like an insect in amber—locked in, based on the letter of the law. This fact makes comprehensive tax and estate planning by qualified professionals essential for protecting one’s wealth, and for ensuring their ability to leave behind an estate, a legacy for future generations. 

Many married couples have joint accounts with rights of survivorship, set up with capital well below the federal estate tax exemption limit (known as the unified credit). Over time, however, that capital can appreciate sufficiently to exceed the limit. It’s an easy-to-overlook detail, a problem waiting to happen—especially for those trying to self-manage their tax and estate planning. 

In my book, You’re Retired. Now What? I share the story of a man who named his second wife as beneficiary on his IRA, after she promised to name his children (from his his first marriage) as her beneficiaries—the recipients of the remaining funds—upon her demise. But his children would learn the hard way that blood is thicker than water. 

After their dad passed, their stepmom changed the beneficiaries to her relatives, on what was now, by law, her IRA. The people whose futures the man had worked all his life to help secure received none of their father’s IRA funds. Oops.

I’ve seen enough in my 30-plus years in this industry to help clients avoid situations like these. Sadly, they happen all the time, and they don’t have to. In this case, a trust would have been my recommendation, and I’d have referred this man to an estate planning attorney to assure it was set up properly. 

Might it have caused friction between the couple? Indeed it may have. But if he’d explored setting up a trust and the stepmom protested, the man would have learned something important about her “investment” in the relationship. Painful as that might have been for a month or two, it may well have preserved the wealth he’d worked for, and assured that his kids received it.

If you believe the discount brokerage houses—the E*Trades, allys, and Schwabs of the world—self-directed investing is the way to go. Save on fees! Invest for yourself! Blah, blah, blah. (And don’t even get me started on Jim Cramer.) Far be it from me to suggest that anyone not play with their money—provided they can afford to lose it. Few can, but many take the risk nonetheless. And lose.

Back in 1987, the late Martin Zweig appeared on the PBS show Wall $treet Week and told host Louis Rukeyser, “I haven’t been looking for a bear market per se… I’ve been really, in my own mind, looking for a crash, but I didn’t want to talk about it publicly because it’s like shouting ‘fire’ in a crowded theater.” The following Monday, the market took what remains its largest single-day percentage nosedive of all time: over 22 percent. All because some talking head scared the heck out of people. What was an individual investor, watching TV on a Friday night, after the markets had closed, supposed to do with Zweig’s warning? There was nothing they could do, and here’s what happened: Stocks began to sell off on Sunday night, as markets reopened in Asia, then in Europe. Come Monday on Wall Street, the Dow fell at the open, and continued its plunge throughout the day, with trading volume at unprecedented levels.

Armed only with the old Wall Street adage, “buy low, sell high,” what chance does a self-directed investor have? Even those who hold firm to that advice risk a crash every bit as devastating as that which befell thousands in October 1987. The reason? Trying to time transactions, which that old adage leads countless individuals to attempt. But think about what’s actually required to succeed in that, on a regular basis. You must get your transactions right not once, but twice, on the way in and the way out. And you must do so much more often than not. Good luck—especially once emotions come into play. They inevitably do, because every market brings moments of doom and gloom, and, as Alan Greenspan once said, of “irrational exuberance.” Both play on your emotions and drive bad decisions.

Everybody knows a crash or a correction is coming. But who knows when? We also know it’s possible to time stock purchases and sales perfectly. It’s just not probable. And so, just as the defendant who opts to represent himself has a fool for an attorney, so too the wealthy person, who thinks they can manage that wealth without help, risks it—needlessly.