The secret at the heart of financial planning is one they don’t teach you in the classroom. The secret is that the financial planner’s main job is to help clients develop reasonable expectations about their money, their lifestyle and their future standard of living. This can be tough emotional work.
In financial theory, risk is equated with volatility. Often this is described mathematically as standard deviation, a measure of how much variation there is in the data. Although the math that illustrates this concept is relatively straightforward, it is not helpful in understanding risk in terms of investor behavior.
When I work with clients, I discuss risk in a much different way. I use simple illustrations to show clients what might happen to their portfolio in a downturn.
To make it even easier to grasp, I talk about real dollars, not percentages. People tend to be comfortable talking about percentages when their portfolio rises, but not when it falls. “We made 5% this quarter,” they’ll say. But when investors see declines in their portfolios they think in dollars: “We lost $50,000 last year.”
As Warren Buffett has famously said, “Price is what you pay. Value is what you get.”
The price of a particular stock is clear to anyone who cares to look it up. Just punch in the stock ticker symbol on a financial website, and you’ll see the current price instantly. Determining the value of a stock isn’t so simple. While a stock’s price is a simple fact, value is subject to interpretation and analysis. Differing opinions of value explain why the buyer and the seller can both walk away from a stock trade thinking that they got the better of the deal.
If you have a globally diversified portfolio, you may have been disappointed with your returns for 2014. For the past several years, U.S. stock markets have been the best game in town. And in 2014, they were pretty much the only game in town.
I participate in a variety of forums with other advisors. Occasionally there is a question, “Should I buy the stock of X company?” The usual response from advisors is to forgo individual stock investments and concentrate on building a low cost, diversified portfolio of mutual funds or ETFs. It’s good advice. It’s also advice I give my clients.
But I have an additional thought: You should buy that stock.
I was talking with a client recently. She was expressing some concern for her investment accounts based on a recent article she read in the New York Times. We talked through some scenarios with regards to how this might affect her investments and long term plans. Although we walked away with the realization that there were not any major changes to her investment plan needed, we did realize something else. Volatility is back.
Our daughter Quinn was born with a full head of luxurious, dark hair. Unlike most infants, hers never fell out. Over the years, we let it grow. Everyone complimented her on her long hair.
Last month we cut it all off.
Many investors quiver with fear over a bear market. This is like being afraid of high tide at the beach. Like high tide, bear markets are a natural part of the investing rhythm, so you should get used to them.
Sumer is here and the weather is beautiful in San Jose. The McCann clan has settled into a blissful summer routine. We had lots of family fun last quarter and are looking forward to a relaxing summer. As relaxing as things can be with two children under the age of three!
The markets have been relaxed lately as well. Every potential global upset has produced a “Meh, whatever…” from the stock markets as indexes repeatedly reach all time highs. Pundits, however, have no shortage of things to talk about. Is it just me, or does everything seem to have a partisan slant lately? You can get your liberal news, your conservative news or your funny liberal or funny conservative news. But you can’t just seem to get… news. Maybe I’m being nostalgic, but I just don’t remember so much of an agenda back in the Walter Cronkite, Tom Brokaw and Peter Jennings days. Which is unfortunate, because to be successful investors it is best to have a clear-eyed view of the investing landscape. Which brings me to my topic for this quarter…
Ahh, spring is here: the trees, the flowers. The barbeque is cleaned and ready to go! And if you live in the McCann house, diapers, lots of diapers… but at least we can open the windows now.
This spring marks the fourth year that I’ve been working as a financial advisor. During that time, I’ve stumbled across several conversations that I’ve mentally titled “Why Hire an Advisor?”
Note: The contents of this site are general in nature and not intended as specific investment advice. All investments are subject to risk; including loss of investment value. If you have any question regarding investments or concepts in these pages, please consult with an investment professional.