Time for a financial caddie?

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“Pro Jock.” “Looper.” That’s what I strived to be in my early days of youth. Those that are familiar with the movie Caddyshack may recognize the reference and, yes, one of my first jobs was that as a caddie. And whereas the Caddyshack movie was quite whacky, in real life the lessons learned by growing up as a golf caddie were life lessons and things as a “financial caddie” I still exhibit today.

  1. Preparation / Guidance – a good golf caddie (“GC”) should arrive to the ball before the golfer and remove any surrounding debris and have yardage-to-the-green ready for the golfer. This is quite similar to how a financial caddie (“FC”) prepares his client for the next big shot in their life, by assessing the current investment environment and creating an Investment Policy Statement/target asset allocation mix and chart of course that can help the client navigate “all 18 holes”.
  2. Paying attention – a good GC needs to be paying attention to their golfer’s needs, i.e. is she cold and needs a jacket from the bag?, is her ball dirty and in need of cleaning?, is she familiar with what the next hole does? A good FC is one that is not only paying attention but being proactive with the client’s needs, i.e. running tax projections to make sure there are no surprises come tax time, running estate planning flow reports to make sure that the clients’ estate planning is in-line with their wishes, etc.
  3. Commitment – I remember some caddies that would quit – sometimes physically, sometimes mentally, sometimes both – out there. That’s bad caddying and a lack of commitment and perseverance. Some days will be beautiful, sunny ones but some will be stormy with difficult conditions. Like a good GC, a good FC makes you, the client, the priority and makes sure that our professional attention, focus and best efforts always have you in mind.
  4. Resourcefulness – Every “loop” is different, every golf shot is different, every round is different the same way in the financial world there are always new things being thrown at you. A good GC and FC will embrace change and always look for new possibilities to solve the problem, unravel the puzzle, and complete the task.
  5. Attitude – the good caddies know that they need to show up to the caddie shack early in the morning with a smile and a hard-working, respectful attitude if they want to earn the continual right of “toting the bag”. At DWM, one of our most valued qualities is a conscientious attitude used to apply diligence for the timeliness of project completion and adherence to punctuality in schedules in respect to the clients we gratefully

That being said, I’d like to share a wonderful experience with you. Schwab & Co invited my father/business partner, Les, to play in the Schwab Cup Senior Pro-Am last week. Pros like Bernard Langer, Vijay Singh, Fred Couples, Lee Janzen, and our new favorite, Brandt Jobe were all there. These are golfers my dad grew up watching and idolizing. Les was able to share the course with these guys and, after a 20+ year break, I came out of golf caddie retirement to strap on the bag one last time!

“So, I tell them I’m a pro jock, and who do you think they give me?” No, not the Dalai Lama, but Les Detterbeck, himself. Third generation of the first Lester. The long putter, the grace, not yet bald… striking. So I’m on the first tee with him. I give him the driver. He hauls off and whacks one – big hitter, the Lester – long, into a one foot crevice, a couple miles east of the bottom of the desert, right on the fairway. And do you know what the Lester says? Gunga galunga…gunga…No, actually he says, “give me the 4 wood” and the Lester proceeds to put it onto the green and two putt for a gross par, net birdie to start our Pro-Am team off in the right direction.

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It was exhilarating day to say the least. We didn’t win the event, but we had a once-in-a-lifetime day, coming just a couple weeks before Les’ 70th birthday. And whereas I doubt I will ever caddie for someone in an official tournament ever again, I know that I will always strive to do my best as a FINANCIAL CADDIE to the wonderful clients we currently serve and future ones.

Of course, this was the first time I had officially caddied in over twenty years. I thought I did a splendid job, my gift to Les for his 70th. Back in the 80’s, I’d be happy to earn $20-$40 for the round to go blow at the local music shop on a few CDs. But this time… there was no money; only total consciousness. So I got that going for me, which is nice.

(*If you haven’t figured by now, Caddyshack is the author’s favorite move of all time. Happy BDay, Les! Gunga Galunga!)

Understanding Risk and Reward

Electronic Discovery Risk Assessment3-1024x664Mark Twain once said “There are three kinds of lies:  lies, damned lies and statistics”.  We are inundated nowadays with statistics.  Statistics are a scientific method for collecting and analyzing data in order to make some conclusion from them.  Very valuable indeed, though not a crystal ball by any means. 

When you study investment management, you must conquer the statistical formulas and concepts that attempt to measure portfolio risk in relation to the many variables that can affect one’s investment returns.  In the context of investing, higher returns are the reward for taking on this investment risk – there is a trade-off – the investments that usually provide the highest returns can also expose your portfolio to the largest potential losses.  On the other hand, more conservative investments will likely protect your principal, but also not grow it as much. 

Managing this risk is a fundamental responsibility for an investment advisor, like DWM.  You cannot eliminate investment risk. But two basic investment strategies can help manage both systemic risk (risk affecting the economy as a whole) and non-systemic risk (risks that affect a small part of the economy, or even a single company).

  • Asset Allocation. By including different asset classes in your portfolio (for example equities, fixed income, alternatives and cash), you increase the probability that some of your investments will provide satisfactory returns even if others are flat or losing value. Put another way, you’re reducing the risk of major losses that can result from over-emphasizing a single asset class, however resilient you might expect that class to be.
  • Diversification. When you diversify, you divide the money you’ve allocated to a particular asset class, such as equities, among asset styles of investments that belong to that asset class. Diversification, with its emphasis on variety, allows you to spread you assets around. In short, you don’t put all your investment eggs in one basket.

However, evaluating the best investment strategy for you personally is more subjective and can’t as easily be answered with statistics!  Investment advisors universally will try to quantify your willingness to lose money in your quest to achieve your goals. No one wants to lose money, but some investors may be willing and able to allow more risk in their portfolio, while others want to make sure they protect it as well as they can.  In other words, risk is the cost we accept for the chance to increase our returns.

At DWM, when our clients first come in, we ask them to complete a “risk tolerance questionnaire”.  This helps us understand some of the client’s feelings about investing, what their experiences have been in the past and what their expectations are for the future.  We also spend a considerable amount of time getting to know our clients and understanding what their goals are and what their current and future financial picture might look like.  With this information in mind, we can then establish an asset allocation for each client’s portfolio.  We customize the allocation to reflect what we know about them, looking at both their emotional tolerance for risk, as well as their financial capacity to take on that risk.  We also evaluate this risk tolerance level frequently to account for any changes to our clients’ feelings, aspirations or necessities.  While we use the risk tolerance questionnaire to start the conversation, it is our understanding of our client that allows us to fine tune the recommended allocation strategy.

A Wall Street Journal article challenged how clients feel about their own risk tolerance and suggested that being afraid of market volatility tends to keep investors in a misleading vacuum.  The article suggests that investors must also consider the risk of not meeting their goals and, that by taking this into account, the investor’s risk tolerance might be quite different.

The WSJ writer surveyed investors from 23 countries asking this question:

“Suppose that you are given an opportunity to replace your current portfolio with a new portfolio.  The new portfolio has a 50-50 chance to increase your standard of living by 50% during your lifetime.  However, the new portfolio also has a 50-50 chance to reduce your standard of living by X% during your lifetime.  What is the maximum % reduction in standard of living you are willing to accept?” Americans, on average, says the article, are willing to accept a 12.65% reduction in their standard of living for a 50-50 chance at a 50% increase.   How might you answer that question?

So, bottom line, it is the responsibility of your advisor, like DWM, to encourage you to choose a portfolio allocation based on reasonable expectations and goals.  However, understanding your own risk tolerance and seeing the big picture of your investment strategy is also your responsibility.  Our recommendations are intended to be held for the long-term and adhered to consistently through market up and downs.  We know that disciplined and diversified investing is the strategy that works best for every allocation!

We want all of our clients to have portfolios that give them the best chance to achieve their financial aspirations without risking large losses that might harm those chances.  Through risk tolerance tools and in-depth conversations, we get to know our clients very well, so we can help them make the right choice.  After all, our clients are not just numbers to us!

Ready for a quick quiz?

financial-literacy-quiz

Two-thirds of the world can’t pass this financial literacy test.  Can you?  You don’t need a calculator, just 3-5 minutes of time.

 

Risk Diversification: Suppose you have some money to invest.  Is it safer to put your money into one business, piece of real estate or investment or to put your money into multiple businesses or investments?

a)One business, piece of real estate or investment

b)Multiple businesses, pieces of real estate or investments

 

Inflation:  Suppose over the next 10 years, the cost of things you buy including housing, food, taxes and health care and all others double.  If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today?

a)Less

b)The same

c)More

Mathematics: Suppose you need to borrow $100 for one year.  Which is the lower amount to pay back: $105 or $100 plus 3% interest?

a)$105

b)$100 plus 3% interest

Compound Interest:  Suppose you put money into a bank and the bank agreed to pay 3% interest per year to your account.  Will the bank add more money to your account in the second year than the first year, or will it add the same amount of money for both years?

a)The same

b)More

Compound Interest II:  Now suppose you have $100 to invest in a (very aggressive) bank who will pay you 5% interest per year.  How much money will you have in your account in 5 years if you do not remove any of the principal or earned interest from the account?

a)Exactly $125

b)More than $125

c)Less than $125

 

Pretty simple, right.  The answer is b for all.  We’re sure our regular DWM blog readers got them all right.

Across the world, however, the 150,000 people who took the test didn’t do so well.  Two-thirds of them answered at least 2 of the 5 questions incorrectly.  The survey pointed out some key findings.  Norway has the greatest share of financially literate people worldwide.  Canada, the UK, the Netherlands and Germany also finished in the top 10. The U.S. didn’t.

downloadIn the Emerging Market countries, like China, India, Brazil and Russia, the young people, ages 15 to 35 were the most financially literate.  Apparently the kids in Shanghai “knocked the cover off the ball” (just like George Springer of the Astros).

So, what’s the takeaway? Financial literacy for Americans could use improvement.  In addition, as we pointed out in our blog two weeks ago highlighting Nobel Prize winner Richard Thaler, people, even if they are financially literate, can make systematically irrational decisions.  This means you may need a financial coach and advocate.  That’s what we are for our DWM clients.  Whether it’s professional investment management, financial decisions and planning, income tax planning, insurance and estate planning matters, we provide our financial literacy, rational analysis and proactive solutions and suggestions.  It’s our expertise and our passion.  At DWM, this is how we hit home runs!