If you have ever looked book of modern architiecture or are familiar with the photographer Julius Shulman, the picture above may look familiar to you. Excepting for the fact that two young women (as seen in middle photo from 1960) have been replaced by my wife Kim and me, it was at this exact location where Shulman snapped the most iconic architectural photograph ever taken, 52 years ago.

Over the recent holiday Kim and I spent a few days in southern California and the central coast, wine tasting and looking for the sun.  We found both in ample supply, and along the way we found the time to tour this Los Angeles house – known as Case Study House #22 and still held by its original owners, the Stahls – and learn about it’s history, it’s current condition and it’s value.

In addition to the pleasures of the house, the tour and a remarkable sunset, we learned that the most recent valuation of the home was approximately $15 million dollars, and that offers of purchase are not uncommon. Although they no longer reside here, and while of course we are not privy to the details of their trust, the owners have never been interested in selling.  Aside from docent-led tours and the occasional weekend visit by the Stahls, the house sits on its hillside, empty of occupants.  Apparently, no amount of money can persuade the family to let it go.

This is not a story about architecture, or photography.  It is about the real or perceived value of personal possessions: How is it that untold amounts of money do not always convince us to part with them?  What does this say about the value of these connections, and how does this relate to the meaning they hold for us?

Understanding the power of that connection – for the Stahls and for each of us as well – can reveal much about the importance of what we use our money for, and about the inter-connectedness between the things we own, our values, our personal histories and the way we live our lives.

Do men and women invest differently?  Do they achieve different investment results statistically?  Is one gender more confident than the other in terms of money management?

Not that gender studies is an under-served discipline, but I believe it’s time we take a closer look at gender-based financial behavior.

It turns out there is much that separates the sexes where the dollar is concerned.  Interestingly, there seems to be a disparity between the family balance sheet and the family investment account.  A ShareBuilder Women and Investing study from 2007 found that just over 60% of women manage the household checkbook and 44% – versus only 23% of men – oversee the budget.  However, only 15% of married women take primary care of the family investments, and only 12% of women – versus 21% of men – feel confident about their investment abilities.

Does this “confidence gap” account for better investment returns in portfolios managed by men?  Of course not!

Not surprisingly, female investors do better on a number of levels, in spite of (or because of) the machismo of men on the subject.  Surveys suggest that while men are more likely to chase so-called 5-star mutual funds and the hot stock du jour, women spend almost twice as much time researching before investing, and they have the results to show for it.  Finance professors Brad Barber of UC Davis and Terrance Odean of UC Berkeley recently found that – although women hold less risky portfolios than men – they consistently achieve bigger returns.

Psychologists have long-held that men are more prone to over-confidence, so we might expect them to manage their portfolios more aggressively.  An over-confident investor is far more likely to engage in excessive trading (costs reduce returns), to rely on market timing to guide them (never a good idea) and to shun the advise of an advisor.  (No comment.)

But back to return.  Barber and Odean found that married men trade 45 percent more than married women, yet they earn risk-adjusted returns that are 1.4% lower.  Amongst the unmarried it gets even worse.  Single men trade 67 percent more than single women but earn annual risk-adjusted returns that are 2.3% lower.  Worse still, men in general trade far more than women, turning over 77% of their portfolios each year to 53% for women.  (It seems men and women both need financial advisors.)

Whether or not these findings conform to popular gender stereotypes (men being more competitive; women more collaborative) is a matter of debate.  In any case, if you are working with me take comfort; I am an outlier.

As for other areas of manly over-confidence, I will take the fifth.

I decided to wait until everyone else had gone public with their New Year’s resolutions before identifying the list below.  (Plus it took the entire month of January to compile these.)

Coaching clients to become better investors – essentially, investing within the larger context of ones goals and foregoing a reliance on economic forecasts and market predictions – is a constant challenge. People generally tend to respond emotionally to the ups and downs within their portfolios, which indicates just how important money is to most of us, or at least how deeply we are connected to it.  When you add to this the effect of financial journalism (which is largely a form of entertainment and has nothing to do with the day-to-day performance of a mutual fund portfolio), it can be very difficult to stay focused or to remain rational.

With that in mind, here are ten “resolutions” which I hope will lead to good investment decisions this year and every year.

1.  I will not invest based on a forecast, mine or anyone elses.  I will recognize that the urge to form an opinion will never go away, but I won’t act on it because one cannot repeatedly predict the future.  It is, by definition, uncertain.

2.  I will not confuse entertainment with advice.  I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor or irrational investment decisions.  If necessary, I will turn off CNBC and turn on ESPN.

3.  I will keep a long-term perspective and appropriately consider my investment horizon (i.e. the probable life-span of my portfolio) when determining my performance horizon (i.e. the time frame I use to evaluate the results).

4.  I will continue to invest new capital when I can, because it is time in the market – and not timing the market – that matters.

5.  I will adhere to my investment plan and continue to rebalance it (i.e. systematically buying more of what hasn’t done well recently) rather than unbalance it (i.e., buying more of what’s hot).

6.  I will not focus my portfolio in just a few securities, or even a few asset classes, as diversification represents the best way to manage risk.

7.  I will ensure that my portfolio is and remains appropriate for my goals and objectives.

8.  I will manage my emotions by learning about and acknowledging the particular biases that influence my behavior.

9.  I will keep my cost of investing reasonable, in order to improve bottom line results.

10. I will stop searching for tomorrow’s star mutual fund manager, as there are no gurus, and this year’s hot-shot may well be (and many times is) next year’s flop.

The Financial Planning Gap

February 1, 2011

Undertaking a process of financial planning is rarely a front-of-mind activity, nor one that many people approach with excitement or anticipation. As important as it may be to identify, assess and prioritize a list of financial objectives, the process can be a difficult and emotional one. And although the results of the process almost always provide a high degree of confidence about retirement planning and goal achievement, a large segment of pre-retirees simply haven’t bothered.

A recent study by the Society of Actuaries (how’s that for a place to take the kid’s on a Sunday afternoon) concluded in a recent survey that nearly half of baby boomers have no financial plans in place in case they live longer than expected.

So what accounts for this gap?

One reason could be the cost of financial planning. With many advisors charging between $1,000 and $3,000 to put together a comprehensive financial plan, it can be cost-prohibitive, although the cost of planning often pays for itself in the first year alone, in a variety of ways.

Another issue is the negative past experiences people have had with financial service providers. This typically has to do with high commissions sales reps, or with brokers who steered their clients into bad investments and never communicated effectively with them about their goals.

A third possibility is the fact that many people have not taken the time to explore their most important goals, many of which are directly connected to their savings and income.

Finally, I suspect that plain old procrastination is the primary culprit. Frequently a new engagement begins with the client telling me just how long financial planning has been on “the back burner” for them. Money can be a confusing, complicated and emotionally-charged subject, and for many it is easy to simply not face it. (“If I don’t go to the doctor, I won’t know what ails me.”)

In any of these cases, finding the right financial planner to work with and communicating clearly about what you want out of the process can go a long way toward helping you achieve your most important financial and life goals. Indeed, it is the number one responsibility of financial advisors to help their clients discover what these goals are.

My experience has been that once people are aware of their financial goals they become very interested in them, and once that happens, they are no longer resistant toward planning for their ultimate fruition .

Last week had the pleasure of a first meeting with a young man (we’ll call him Jack) who represents the youngest generation in a family that I have been working with for seven years.  While preparing for the appointment, it occurred to me that this was the first time in my career that this phenomenon had occurred.  I have worked with siblings, formerly married couples, the elderly and their trustees, but never had I met individually with the first, second and third generations of the same family unit.

I wondered before the meeting, would I recognize Jack’s money values as being consistent with those of his parents and grandparents?  Would there be a thread that linked the way each generation related to their money?

Our consultation couldn’t have been more basic:  how best to allocate a moderate amount of cash into an investment portfolio which reflected Jack’s general profile, objectives and constraints.  Upon reflection, I realized that I was moved less by the obvious inter-connectedness of the family than by the ways in which money linked them together, and for the good.

I have seen many examples of this:  the transformation of an inheritance into a meaningful financial outcome for heirs and their families; a grandparent opening an educational account for their grandchild where the parents may not have had the means to do so; a family consciously budgeting for an annual vacation which the eventual adult children continue (using their own money); a child using the savings of her accumulated allowances to buy a gift for her parent.

What struck me as I listened to Jack outlining his financial goals and investment expectations was the uniformity of the approach to money between all three generations of his family.  Money values that had originated with his grandparents, and which I had witnessed during conversations with his parents, were now being espoused by Jack, age 21.

Many in my profession are of the belief that the innocent money messages we receive as children are carried forward into our adult lives.  A person given cash willy-nilly all their lives may never learn to save; the children of parents who are fearful of the stock market are usually less inclined to invest as adults; someone who witnessed their family suffering in the Great Depression may never be comfortable spending their money, no matter how much of it they have.

Conversely, a child who is taught to save their allowance and is rewarded for doing so can learn to appreciate the value of compound interest; a person who grows up being involved in family discussions about charitable giving sees the impact of money on the greater good; parents who educate their kids about the role of money in our society, both for good and otherwise, will likely produce adults with a broad understanding of money, who can then hopefully direct their own income and savings in a more well-rounded manner.

We may not be able to fully dictate the financial values our children carry into the world, but we most certainly can influence them, as I have now seen, first hand.

Expectations and the Economy

December 27, 2010

It’s amazing how the public’s expectation about the stock market and the economy seem to be influenced by whichever direction the markets happen to be performing at the time.

A recent study by Putnam Investments found that 61% of Americans believe that stock prices will rise in 2011, and that forty-three percent are betting on a better housing market.  A third believe the economy “will be much healthier” in 2011, and 47% expect that “consumers will start to spend again.”

I can’t prove this statistically, but I’m willing to bet that in 2001, 2002, and 2008 (the last three calendar years the market was down) a majority of the same 1,000 survey participants would have predicted that the markets would continue to fall the next year and that the housing market would worsen.  This is the nature of financial  prognostication.  When the economy is good and the markets are on the rise, we expect the trend to continue.  Conversely, when the economy is in recession and the markets are down you hear comments like, ” I don’t see this improving for some time,” or, “I sold my equity funds and plan to stay in cash until the markets improve.”  (Of course by the time they get back into the market most of the gains have already transpired but that’s another story.)

Not surprisingly, the head of global marketing at Putnam says that these results show that “despite the fact that this has been difficult year, Americans retain their essential optimism.”  This may be true, and it would be a convenient explanation regarding the survey, but I suspect the results are more about psychology than optimism.

The prolific Fidelity portfolio manager Peter Lynch once famously said that “the real key to making money in stocks is not to get scared out of them.”

As I write, the equity markets (as measured by the S&P 500) are enjoying year-to-date gains of around 6%, a modest yet welcomed result.  The Nasdaq index is up over twice that amount, climbing just over 14% since the beginning of the year.  (Less modest and more welcomed.)

Coming off the losses we experienced from October 2007 to March 2009, it’s certainly been a plus for those in my line of work and for the clients we serve to see the markets recovering some (not all) of those losses, no matter the stalled recovery and seemingly constant economic uncertainty.

Whatever the current condition of the market, it seems like a good time to acknowledge the fact that volatility – up or down – is a constant, while gain and loss will forever be taking turns acting upon client portfolios.  Volatility itself has no bearing on whether or not we make or lose money within our portfolios.  Selling determines that.  Knowing this, it is important to distinguish between volatility and loss, and to reinforce the fact that they are not the same thing.

I would venture to say that clients of Milestone Financial typically have a higher-than-average level of acceptance concerning volatility; that is, they have been asked to identify the margin of volatility they can accept, knowing that, in general,  for every tick up or down on the volatility scale there is a corresponding amount of gain or loss which they can expect when it comes time to sell.  Setting an investment policy which relates (among other things) to “volatility”, clients tend to be more patient when portfolios experience a “loss”.

In any case, it may be useful to clients and non-clients alike to illustrate the loss-volatility distinction by way of Warren Buffett, who controls Berkshire Hathaway Inc:   to wit: what result did three cataclysmic market events have on Berkshire Hathaway stock, and what was his response as an investor during each of them?

On October 19, 1987, the date of the single greatest one-day crash in stock prices in American history, Buffett’s personal shareholdings in Berkshire Hathaway declined by $347,000,000.  That’s the amount he “lost” in one day.

But he didn’t sell, therefore he technically didn’t “lose” anything.

Then, between July 17 and August 31, 1998, he “lost” $6,200,000,000.  Yes, that’s six billion, two hundred million dollars.

Still he didn’t sell.

Finally, between the October ’07 market top and the March ’09 bottom, Warren Buffett “lost” approximately $25 billion dollars.  But of course, he didn’t sell even then.

When asked by a CNBC personality subsequent to March ’09 how it felt to have lost 40% of his lifetime accumulation of capital, his response was that it felt about the same as it had the previous three times it had happened.

Here’s the instructive part:  during the period of time between the first and second of these events, Berkshire Hathaway stock grew from $3,170 per share to $60,500 per share.  Between the second and third, the share price grew from $60,500 to $73,195.  On October 29 2010 Berkshire shares closed at $119,300.

Granted, this is probably the most extreme example one could find regarding the negative correlation between loss and volatility, but that doesn’t make it a bad example, and it certainly doesn’t make it wrong.

The key to coping with volatility is to understand it in the context of loss.  Volatility has been a constant in equity markets since there’s been equity  markets, and it is here to stay.  All by itself, volatility does not determine the amount or the severity of loss (or gain for that matter) of capital.  For that to happen, investors must behave in certain ways.  Reacting to volatility is natural.  Indeed, it would be difficult not to have an emotional response to the decline in the value of your portfolio (especially a severe one) as most of us experienced over the last decade or so.

The challenge is to not react to volatility by abandoning the tenants that led you into the markets in the first place, but to recognize it as an inevitable part of the investment process.  Volatility cannot be controlled, but our response to it certainly can.

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