When a Man Loves a Stock

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I was waiting to pick up a to-go order one night after work last week and I was still deep in thought about a recent client meeting. The tax planning and risk management portions of the meeting had gone very well, but I once again could not break through on the investment strategy piece. Despite repeated recommendations over numerous years to try and get this husband and wife to further diversify their portfolio, a vast majority of their net worth is still tied up in one particular stock. It was at that moment that an old song I happen to like came over the speakers: Percy Sledge’s “When a Man Loves a Woman.” Here is what I heard:

When a man loves a stock
Can't keep his mind on nothing else
He'll trade the world
For the good thing he's found

If holding the stock is bad he can't see it
The stock can do no wrong
Turn his back on his best friend
If he put the stock down

 

When a man loves a stock
Spend his very last dime
Trying to hold on to what he thinks he needs
He'd give up all his comforts
Sleep out in the rain
If things don’t turn out the way he thought it’d be

 

Well, this man loves a stock
He gave it almost everything he had
Trying to hold on to its precious dividend
I hope it don’t treat him bad!!!

 

When a man loves a stock
Down deep in his soul
The stock can bring him such misery
If the stock plays him for a fool
He's the last one to know
Loving eyes can't ever see…

 

Now with apologies to Percy, my thoughts and his lyrics got a little mixed up. Still, it is kind of uncanny how interchangeable “woman” and “stock” is, isn’t it?

Based on my experience I think it probably is safe to say that the degree of emotional attachment employees sometimes develop with their company’s stock, investors sometimes develop with the stock of companies headquartered in their state or region, and heirs sometimes develop with stocks they have inherited can only be rivaled by romantic crushes. No matter the stock, and no matter the consensus outlook on that particular stock, I always remind people with significant holdings in one or a couple of securities of companies like Enron, Wachovia, and General Motors. Anything can happen to the stock they love, and although concentration can sometimes lead to wealth accumulation, diversification certainly helps with wealth preservation.

Next time I will once again attempt to articulate the risk-adjusted advantages of a prudently diversified portfolio, but I may just have to make the next meeting a dinner meeting. Perhaps old Percy Sledge’s tune will come on again and resonate with my clients like it did for me. Here’s hoping, because loving eyes sometimes can’t see.

-Tom

Extra! Extra! Read All About It?

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I don’t know about you, but I prefer my sports teams winning versus losing, sunshine to rain, and the stock market trending upward as opposed to trending downward. I’m not sure the media does. Think about the coverage surrounding Mark Richt’s exit from UGA, the Braves’ rebuilding and relocating, and the Falcons’ collapse after starting 5-0. Think about the coverage every time we have tornadoes or, better yet, every time we might see a snowflake. Think about the coverage when the stock market is down a few hundred points in one trading day. There is so much more “breaking” news, so many more news alerts, smart phone notifications, and headlines that are shared when the news is bad. After one of the most volatile and negative months investors have experienced in several years, I’d like to ask you to briefly turn over your phone, mute your television, silence your radio, and turn off your computer for just a few minutes and look at the last ten bear markets with me.

A bear market is defined as a drop of at least 20% from the most recent market high. Below, is a pretty fascinating chart put together by J.P. Morgan showing the characteristics of the last ten bear markets (click on it).

As you can see, markets were down around 86% during the Great Depression. Markets were down 28% during the Cuban Missile Crisis. At a point during the 70s, and during the OPEC oil embargo, markets were down 48%. Markets were down 34% at a time in the 80s after Black Monday and the 1987 market crash. Markets were down 49% in the early 2000s when the tech bubble finally burst. Markets were down 57% during the Great Recession.

Folks, the S&P 500 was down about 5% in January and I’ve seen a whole host of headlines using phrases like “market crashes,” “market plummets,” and “investors robbed.” A catchy title or headline is obviously and purposefully trying to get you to buy a paper, watch the news show, or click a link, but I think it’s important to keep things in perspective.

On the right side of J.P. Morgan’s chart you may have also noticed some data on the bull markets or market recoveries. Markets roared back after the Great Depression, the Cold War, the inflation of the 70s, the Federal Reserve intervention in the 80s, the bursting of the tech bubble, and the Great Recession. On average, the last ten bear markets have been around a 45% pullback while the last eleven bull markets have been around a 151% pop!

Don’t get me wrong, I am concerned about a lot of things going on in the world, and I would not be surprised if market volatility continued. Inevitably, at some point, there is going to be another entry on the “bear side” of J.P. Morgan’s chart. Of course history also seems to offer there will then be another entry on the “bull side” of J.P. Morgan’s chart…

What am I telling people to do? The same things I’m always telling people to do! Make sure you have enough cash set aside to feel comfortable and for any large, upcoming expenses. Make sure that your portfolio is prudently diversified for your risk tolerance and age and stage in life. As hard as it is to accept, volatility is the friend of the long-term investor. The thing is, you have to stay buckled in during the down times in order to fully participate in the up times.

At the rate many media outlets are going, I really don’t know what phrases and terms they will use when we have our next bear market. I don’t know how far they’ll go to try and convince everyone that this time is different. I’ll continue to vigilantly monitor the markets, but don’t expect me to get caught up in some headline. I’m much more interested in focusing on the cataclysmic stinkage of my sports teams and the next allegedly imminent blizzard!

-Tom

Unplugging from Work

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Happy New Year! I hope you and your loved ones had a wonderful Christmas and a special holiday season. I also hope you were able to unplug from work. Were you?

A CareerBuilder survey taken in July found some disturbing news. Almost one in five people acknowledged that they had no ability to unplug from the office. Almost one in five people said they had a tough time enjoying other activities because they were thinking about work. Almost one in four people admit to checking work emails during activities with family and friends. Almost one in four people said work is the last thing they think about before they go to bed. Almost two in five people said work is the first thing they think about when they awake. Now I’ll admit that after my alarm goes off Monday through Friday, I often strategize my work to-do list in the shower, but other than that, what is wrong with these people?

As the old adage goes, no one on their deathbed has ever said “I wish I had spent more time at the office.” I don’t know about you, but I work to live. I do not live to work. I enjoy and get fulfillment out of my job, but if I could be at the beach with my family or at the game with my friends, I would!

There have always been "workaholics," but thanks to good old technology, now it’s even harder to separate work and life. An article on Time's Money.com states that the Center for Creative Leadership found smartphone users spend an average of five hours on work emails each weekend, and a Glassdoor poll found more than 60% of people work during a vacation.

Look, I’m not advocating to slack off or not work hard, but I am advocating to work when you work and play when you play. I am advocating for building a moat between work and life. I am advocating for looking at things in terms of life/work balance and not work/life balance.

I once had a supervisor articulate that time off did not mean less work; it simply meant rearranging when you did the work. I’ve found that to be true, and a good way to look at vacation. Get all of your stuff done that has to be done before you go, work ahead as much as you can so you won’t be drowning when you come back, and then tell your boss and co-workers you’re gone and actually fall off the grid!

Let’s face it, though, despite your best efforts to leave everything tied up in a bow, something is probably going to hit the fan while you’re out. Who is going to address the issue? You if you don’t leave other people’s names, phone numbers, and emails who can pinch-hit for you on your auto response emails or your voicemail. And just say when you’re going to be back versus some line about periodically checking emails. Cut the cord!

There may also be times where you have to protect yourself if you are truly going to disconnect. If you get a text from a co-worker at an ungodly hour, don’t respond immediately unless you really have to. If someone emails you on the weekend and you happen to be working, don’t reply immediately unless it’s absolutely necessary. This can be a bit trickier, but if a client or customer starts trying to do business after hours, you may need to consider waiting to respond until normal business hours to really establish a boundary. If you always jump when the open sign is off, you are setting expectations that don’t allow you to ever unplug. Remember, if you give a mouse a cookie (or a co-worker or client an unnecessary response while on vacation), he or she is probably going to want a glass of milk!

Finally, if you are a smartphone user, may I make a recommendation? Turn off the “Badge App Icon” for your email under “Settings” and then “Notifications.” This will get rid of that evil little box that tells you how many unread emails you have. It’s liberating – trust me!

Occasionally I work at night, once in a blue moon I work some during a weekend, and ever so rarely I send a work text or a work email while on vacation, but for the most part, I unplug. There is a point where productivity and quality will suffer if you work enough hours. If you’re rested, you’ve had a little fun, your spouse is happy, you’ve spent some time with your family, and you have a few friends, you’ll actually be a better employee. I bet you’ll be a happier person, too!

-Tom

Normal Investors - Familiarity

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Imagine you are just getting home after a very busy and stressful day at work. You just closed the door to the garage, dropped your bag on the couch, and are making your way up the stairs towards something you value deeply - comfortable clothes. Yep, there’s that old pair of jeans you wore yesterday. You know the ones with the slightly worn knee and the stretched out belt loop from where you like to rest your thumb? Best of all, they’re everso slightly stretched out from your wearing them yesterday. Don’t worry, I won’t tell anyone!

Of course there’s a similar feeling when you return home after travelling, whether for business or for pleasure. That moment after you’ve filled the laundry bin, returned your toothbrush to its normal spot, and have finally put up the suitcase. Oh it’s nice to see your shower, your couch, and most of all, your pillow! Wouldn’t you agree?

As you’ve undoubtedly gathered, I’m talking about familiarity. Whether a pair of comfortably worn jeans or your old friend of a pillow, familiarity feels good. It’s what you know. It’s what feels right. It’s what feels safe. Familiarity is also the third tendency that I present to you as a trait many normal investors have.

I would offer that many people go with what they know, especially when they are unsure of what is best. Consider some research done by Vanguard back in 2010 that found that Canadian investors were 65% invested in Canadian stocks, U.S. investors were 72% invested in U.S. stocks, and Australian investors were 74% invested in Australian stocks. Canadians, Americans, and Australians certainly have their differences, but do you really think the before mentioned investment allocations coincidentally showed that degree of “home bias?” I don’t. Investors were investing in what they felt they knew.

To take this a step further, let’s spend a moment on company stock. Regardless of the company, most people I come in contact with who work for publicly traded companies tend to own stock in their employers. Why? Do they think their company’s stock is going to really pop? Sometimes. And sometimes, they’re right, but sometimes they’re not. I’ve met many successful employees and successful investors who have a significant portion of their wealth in “their” company stock, and they desire to continue holding that stock even when they are no longer actively working for the company. Why? I think it’s because it’s easier for someone to feel safe investing in a company that they know a little about rather than the broader market which they may not know as well. Employers are aware of this, too, and that’s one reason employees are often incentivized with company stock in an attempt to align the employee’s financial success with the company’s future financial success and encourage hard and good work from employees.

(As an aside, I attended a lecture given by a professor from the Wharton Business School earlier this year, and he shared that a study was currently being done on what stocks were the hardest to get investors to diversify out of based on their location. #2 was supposedly getting a Seattle resident to sell some Microsoft stock (Microsoft is based in Seattle). Guess what #1 was? Getting stock in The Coca-Cola Company out of an Atlanta resident’s hands! Do any of my local readers here have any Coca-Cola stock? If you don’t, I bet you have friends and family who do!)

Familiarity feels good. Investing in companies that are based in your country is normal. Investing in the company you work for is normal. Investing in companies that are near and dear to your city or state is normal. However, you have to be careful when considering the investment risks of being overly concentrated in a single stock, a single sector, a single asset class, or a single country’s stocks. The risk-adjusted returns of a diversified portfolio are often still king. Going with what you know, what feels right, and what feels safe can be a crutch and a safety blanket, but what if your crutch was named Enron? What if you’re a Greek citizen and Greek companies are what you know? What if your paycheck was coming from Lehman Brothers, the pension benefit you were working for was guaranteed by Lehman Brothers, and most of the stock you owned was invested in Lehman Brothers stock? It’s normal to invest based on familiarity, but that may not always be best.

There’s nothing I hate more than when a grocery store I frequently visit decides to remodel. It’s frustrating. It doesn’t feel like it used to, I don’t understand the layout, and I don’t know where anything is, but I will get used to it. Eventually the new layout will feel familiar. Sort of like an investment portfolio that has recently been adequately and prudently diversified, eventually the new layout will feel familiar.

-Tom

Next up: overconfidence

Stumped!

It was slightly more than a routine trip to the vet, but it was not supposed to be a big deal. Our dachshund, Miss Lucy Bristow, was going in for her five-year dental cleaning and some X-rays. Sure, it wasn’t a “normal” visit, but I wasn’t ready for what was coming my way. I wasn’t prepared for the financial question on page two of the obligatory paperwork. It read something to the effect of:

Should your pet experience a life-threatening injury or illness, every effort will be made to reach you. However, if you are unable to be reached, you authorize $__________ worth of treatment/services/materials to be performed/used by the veterinary practice in an effort to save your pet’s life.

Woah! What a question! I may help people with their finances for a living, but I’ll be honest with you, at that moment, with an unexpected question like that, I didn’t have a clue. I was stumped! To make matters worse, I knew my wife was tied up in a client presentation. This decision would be mine and mine alone.

In my efforts to stall so I could regain some composure, do some soul searching, crunch a few numbers, and consider what my wife might do to me if something were to happen to Lucy and I didn’t put quite a big enough number in that giant blank space, I asked one of the nurses what people usually put. She laughed and said, “It’s a tough question, isn’t it?” I nodded. She said she had seen everything from $0 to $15,000! Woah again! Still, I was relieved to hear her words as the number I was considering was definitely between the two she offered.

I tell you this story for two reasons: 1) So if you are a pet owner you can go ahead and be thinking of your answer should you ever be asked that question and 2) To make the point that there are some really hard financial questions out there that you need to be able to tackle. Questions such as:

• Can you afford that bigger house?
• Can you afford for one of you to quit working?
• How much auto, home, life, disability, long-term care, and liability insurance do you need?
• Are you saving enough for retirement?
• Can you retire?
• How much can you afford to spend?
• Who should be your Power of Attorney?
• How would your assets be distributed if you passed away tomorrow?

Sometimes life throws you a financial surprise (like a blank space on a veterinary form), and it’s okay to be temporarily stumped. Take a deep breath, think through your options, talk to a clear-headed, neutral third party if need be, and figure it out. Other tough financial questions are the “five-hundred-pound gorillas in the room” until they are answered. I’d suggest you go ahead, bite the bullet, and answer those. Knowing how you are doing is important. Knowing what you can afford to do and not do is important. Knowing all would be financially okay for your loved ones if something happened to you is important. Those questions can and should be answered.

I finally gave the nurse a number. Later, when I was telling this story to my wife and asking her what she would have put, I found out that our numbers were actually really close, but mine was a little higher. Whew! Either way, I’m happy to report Lucy came out just fine, and that’s what matters!

-Tom

The Right Answer

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With all of the great college football bowl games that have been on television recently, I have seen a lot of fans doing some pretty strange things. Some fans are flat out in costume. Some are chanting the same words over and over, while some are constantly jumping in place, and some even make animal sounds during kickoffs! I can’t help but think of that old Bud Light commercial showing fans doing similarly strange things in an effort to somehow help their teams win the game. The slogan reads, “It’s only weird if it doesn’t work.”

In my world of financial advice, people ask me questions all the time. Sometimes I know or can find the “correct” financial answer pretty quickly, but most of the time I need to develop some sort of probability analysis or perform a calculation or projection before I can offer the “correct” numerical solution. The thing is, my initial “correct” financial answer or “correct” numerical solution isn’t always right for the client who asked the question, and it’s not because of faulty research or incorrect math; it’s because it doesn’t yet factor in my client’s feelings or emotions. The slogan for the financial advice I try to give to people would read, “It’s only correct if it works for you.”

Let’s say someone has $10,000 to invest and asks me if they should invest it all in gold. Let’s say a retired person who has more assets than they likely need to continue to live comfortably is really concerned about the world situation and asks me if they should invest $10,000 of their assets in gold coins to put in their safe deposit box. My long-term investment advice would probably be the same to both parties, but it might not be the right answer for both parties.

One of the questions I’m asked most frequently is when someone should begin drawing their Social Security. Someone can choose to start at age 62 or wait until age 70 and likely receive a higher benefit for each year they waited, but it is not always an easy question to answer. If two 62-year-old clients with the exact same assets and retirement incomes asked me if they should start Social Security, but one of them is losing sleep because they are concerned that the government might change their benefits if they wait to start drawing Social Security, my Social Security advice would probably be the same to both clients, but it might not be the right answer for both clients.

If two people can finally pay off their low-interest student loans or make their annual IRA contributions, but one of them has really been struggling with the fact that they still have student debt, my cash utilization advice would probably be the same to both people, but it might not be the right answer for both people.

My point is that almost all financial decisions are double-edged. There is often an analytical or numerical “correct” answer and an emotional “correct” answer. When those are the same, it’s easy to decide what to do, but when they are different, it can be quite the conundrum. Some of the deepest and most meaningful conversations I’ve ever had with clients have come from discussions where financial expertise seemed to suggest one thing and emotional credence seemed to suggest another. I take the privilege of being a part of such conversations very seriously, and it is because of conversations like these that I know no software, no app, no robo-advisor, and no strictly commission-based broker can completely replace my role in helping people think through the tough financial decisions to find their right answer.

When you find yourself facing a tough decision where your emotions and finances seem to be pushing you in two different directions, proceed with caution! Be careful relying on what you’ve read, what you’ve heard, what your computer says, and what Bob told you he did that time in the break room. Remember, it’s only correct if it works for you, and I’m happy to try to help you find your right answer.

-Tom