The Road to Financial Success: The Things You Did Not Do
The following post is an excerpt adapted from a letter sent to my financial advisory clients in February 2021.
There is an idea that seems to persist through the years that great investors “win” based on proactive and, dare I say, heroic moves.
“She made a great buy!”
“Through savvy negotiation, he came out on top!”
“That was a brilliant trade!”
“Through dogged research, they found a diamond in the rough!”
These types of efforts make for great stories, but in my experience, they are not the way that most people actually “win” financially. In fact, these dramatic efforts frequently end up in loss and disappointment. Often, it is the things we consciously DO NOT DO that lead to great financial success over time—particularly in years like 2020:
1. Do Not Overspend.
After working with hundreds of retirees and people hoping to retire one day, I can say one thing: even if your sail is full and the current is carrying you along nicely, you’re not going to enjoy the end of the cruise if there is a big hole in the bottom of the boat! Not outspending the capacity of your income and assets are key to financial success. This requires consciously not acting on the almost constant marketing messages and purchase impulses.
“My other piece of advice, Copperfield,” said Mr. Micawber, “you know. Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”
2. Do Not Sell (out of a well-designed portfolio at the wrong time).
Investor resolve was tested in 2020 in a way that many investors had never before experienced. It was a challenging year that required a steady hand on the tiller. We have seen time and again the financial destruction that can result from selling out of good investments at bad times. Although it is never certain, in 2020, those who owned quality investments and stood fast during the market crash and economic recession of 2020 were likely rewarded with a whiplash-inducing rebound and ended the year with strong market gains. Those who flinched and sold at a loss, missed the turn and likely suffered investment losses.
IVY Investments ran the numbers and put together this powerful illustration of how selling and missing just a few key up days on the S&P 500 in 2020 resulted in drastically worse performance than holding ground. Had they been invested in a portfolio reflective of the S&P 500, those who missed the best market trading day would have missed more than 10% of the market’s rebound. Missing the two best days would have resulted in a -1% return (compare that to the S&P 500’s 18.4% 2020 year-end return!). More likely, though, are those people who sold on the way down, and waited “for things to look better” before buying back in. If anyone missed the 10 best S&P 500 performance days in the above scenario, they would have suffered a -33% return for 2020!
3. Do Not Chase Shiny Objects.
This is the challenge before us today. Bitcoin, Tesla, GameStop and whatever the next new thing will be. Headlines today are dominated by high-fliers. We have seen this before—typically right before a fall. There is a feeling that you are missing out as you sit on the sidelines while others are in the game. We know this feeling can create strong impulses that lead people to put their hard-earned money at risk in highly speculative or over-inflated holdings. The returns on many of these types of speculative holdings are being driven by a mob psychology feeding frenzy, rather than the actual economic value or earnings of the holding itself. We have seen this before, and if history offers any guidance, many of these investments will crash and burn. Even companies that seem to be doing great things can become over-priced. As an example, analysts at Morningstar currently calculate the fair market value of Tesla at $306 per share. As I write this on February 1, 2021, Tesla is trading at more than $830 per share.
Will Tesla sell more cars than all the other major auto manufacturers in the world? Will the world buy twice as many cars in the future? Or, as seems to be the hope, the geniuses at Tesla will continue to develop and offer new products and services.
Tesla may double in the next year, Bitcoin may “10X,” and raiding hoards of Redditors may continue to pump up other companies previously thought to be on the verge of collapse, but if history offers any guidance, many of these types of super-heated holdings will crash and burn.
Trying to analyze future winners and losers is important, but the key question is “How much of your wealth, your units of future financial freedom, do you want to put at risk? For most people, the answer would be “not more than I can afford to lose.”
If you find yourself wanting to run with the bulls and put money into such positions, give us a call. You may be surprised to learn that you already have a measured exposure in your portfolio. If not, we can use our financial planning tools and techniques to help think through how much of your portfolio is “core capital” that is needed to fund future goals and retirement spending (which you cannot afford to lose), and how much of a “risk budget” you may have (which you could afford to lose without upsetting your financial plan and goals).
Money Matters/Lessons Learned 2020
I’m certain 2020 is a year that will be studied, discussed, and debated in financial circles and classrooms for decades to come. In this month’s “Money Matters” radio episode, I reflected on what I saw as a few of the key financial lessons 2020 offered:
Planning mattered
Balance mattered
Flexibility mattered
Your sources of information mattered
You can listen to the full episode here: Money Matters on WTIP, January 2021
If you’d like to listen live, I’m on WTIP 90.7FM the first Wednesday of each month at 8:50 a.m. CST. There is a “Listen Now” button on the top right-hand corner of their homepage.
New Developments
While the challenges of 2020 certainly had us hopping, and the market’s plunge in the first quarter had us engaging in many meetings with clients, it was also a year for a lot of behind-the-scenes building for Cahill Financial Advisors. Several projects our firm has been working on (a few of them for multiple years) came to fruition in 2020. Here are some highlights:
TEAM
The advisory team of Andy Tate CFP®, Ben Setterlund, CFP®, and Scot Boland joined Cahill Financial Advisors in 2020! Andy and Ben teamed up 20 years ago, and with Scot’s help as their Practice Coordinator, they work with approximately 200 client households. We are happy to have Andy, Ben, and Scot bring their talents and experience to the team, and welcome their clients to Cahill Financial Advisors!
TECH & TAXES
After extensive vetting and industry research, Cahill Financial Advisors decided to adopt Black Diamond Wealth Platform as our portfolio management platform. From your view, Black Diamond will offer significantly enhanced portfolio reporting options, a new client portal, and an app for mobile account visibility. This robust platform also gives us an updated “Captain’s Chair” to monitor and manage portfolios, including the ability to build out decision-based rules for account rebalancing and trading. Integrating Black Diamond was a significant financial and time commitment, and I am very thankful for the hundreds of hours our team has invested in this conversion project!
On the financial planning side, our team has adopted Money Guide Elite and Holistiplan, two dynamic financial planning tools that allow us to bring robust tax planning capabilities into client planning meetings.
TIMELY COMMUNICATIONS
I have been committing more time to putting together broad-based communications on investments, financial planning topics, and the human elements related to money that we see in our daily work with clients.
A few pieces that drew the most attention in 2020:
While my blog, www.ScottOeth.com is home to more in-depth pieces, I’m sharing in-the-moment thoughts and commentary on my professional social media sites, and I invite you to follow me there:
Linkedin: https://www.linkedin.com/feed/
Facebook: https://www.facebook.com/scott.oeth.financialplanning
I appreciate your confidence and support through the trials of 2020, and I look forward to working together in 2021 and beyond!