There’s a passage in the Old Testament that says “With the aged is wisdom and with life comes understanding.” I’m still working through the idea of being “aged” but I can tell you that the wisdom and understanding I’ve acquired over the years has come from my own mistakes and by observing others whose lives I admire and want to emulate.
I’d like to begin with a little background and perspective on my history with money. My father grew up during the 1920s and 30s. Like many of his generation, his views on money were significantly influenced by the Great Depression. After flying 30 combat missions over Nazi Germany, my father went to work for Merrill Lynch in the 1950s. So, I grew up around the financial services business. Money, in our home was to be earned and saved for the future. It was not to be given away.
In 1983, after college, I went to work for a large Wall Street firm where the focus was on selling investments. In 1990, I determined I could better serve clients as an independent advisor and affiliated with Raymond James. I built a nice practice over the years based mostly on investing in individual stocks.
In 1999, we bought a bigger house, joined the country club, and put the kids in private school. I thought that having more and doing more would make me content and satisfied. The very next year, we entered the worst bear market of my career- and that’s when my “lessons learned” education began.
At the same time my portfolio was taking a hit, I was helping to start up a ministry called Childspring International, which brought children to the U.S. for medical care not available in their own countries. Through Childspring, I had some opportunities to travel to Ethiopia, Haiti, and parts of Central America. While I was stressed out over the club dues and next tuition payment, I saw children dying from malnutrition and easily curable diseases. As you might imagine, my views on money were radically influenced by those experiences- and my education continued.
So, it was during that time, and through those experiences I learned what I’ll share about planning and managing financial resources, and especially what I learned about wealth and happiness. Today, we’ll cover creating a financial plan, managing investment portfolios for accumulation of wealth, and some of what I’ve learned on the topic of wealth and happiness.
Many perceive financial planning to be a complex and time-consuming process. That is untrue. For most of us, financial planning is very simple. In fact, I will share in first person language what a plan includes, so that one could write an overview of a complete financial plan on the back of a napkin.
First, an Estate Plan- I have a valid will addressing medical and guardianship issues and have titled assets to provide for the efficient transfer of property according to my desires. My spouse has a copy of our written plan with instructions, account numbers and key contact information so that, in the event of my death, she knows exactly what steps to take.
Next, Life and Disability Insurance- I have insured future liabilities such as mortgage and education expenses against my premature death. Additionally my income stream is insured, because in the event of my death, I do not want the lifestyle of my loved ones to be compromised. I also have an emergency fund and have insured my income against long-term disability.
Third, Tax Planning- I am confident either through my use of tax planning software or through a qualified tax preparer that I have done everything possible to plan for and minimize my tax liabilities.
Fourth, College Savings (if applicable) - Because I don’t want my children or grandchildren to be saddled with debt from college loans, I have a program in place to provide for their education, which may cost anywhere from $12,000 per year at a state school to $60,000 per year out of state or at a private university.
And finally, Investment Income Planning- I am saving and investing systematically for the future. These investments will have potential to provide investment income for when I no longer have earned income, to facilitate a desired standard of living with a goal of not outliving my financial resources.
That’s it. Those five simple statements represent the foundation of a complete financial plan.
Many believe that investment success is determined by the stocks, bonds, or mutual funds one owns along with an ability to forecast the market. That is untrue. Investment success is determined by appropriate behavior. Investment failure is driven by inappropriate behavior such as, panicking and selling in bear markets, speculating on “hot tips” or high risk investments, or not properly diversifying your portfolio. Benjamin Graham, the father of disciplined investing wrote:
"The investor’s chief problem and even his worst enemy, is likely to be himself”
The 2017 DALBAR™ study reveals that in the past 30 years, the average investor in the stock market has earned an annual return of 3.98% versus a market index return of 10.16%. In other words, over time the average investor generates returns of less than ½ that of the overall market. The most common behavioral mistake is to change one’s investment portfolio based on market forecasts. Warren Buffet said:
“I believe that market forecasts are poison and should be locked up in a safe place, away from children, and away from grown-ups who behave in the market like children.”
Unfortunately, the financial media is overwhelmingly focused on market forecasts- everyday interviewing “experts” telling us what they believe the market will do in the next two months or two days. It is important to note that the financial media are businesses attempting to sell us something for a profit. They keep our attention by focusing on market predictions and the current “crisis of the day.” In turn, they generate ratings to bring in more advertising dollars, thereby serving their own profit motives. This encourages short-term thinking and causes investors to behave in ways that undermine their own success. So, I'll share three simple investment principles that may help in the accumulation of long-term wealth and income planning.
The first principle is FAITH IN THE FUTURE
Investing is essentially a battle that takes place in our minds and emotions. It is a battle between faith in the future and fear of the future. Success is determined by which impulse wins. This is not a matter of blind faith or mindless optimism. In fact, it is quite the opposite. Since 1926, as of the end of 2014, the U.S. market index has grown from $1 to over $7000. So, if you think about it, faith in the future is the only perspective that is consistent with the historical record. In 1983, when I began my career, the Dow was around 1000. Thirty five years later, it is over 25,000 and that does not even include dividends. So, which perspective has better served investors, faith or fear?
In every crisis over the course of my career- from the crash of 1987 to the 2008 global financial meltdown- the financial media fanned the flames of anxiety and fear. The experts always said “it’s different this time” and every time they were wrong. John Templeton, the pioneer of global investing actually said:
“The four most dangerous words for investors are “it’s different this time.”
The circumstances were always different, but the outcome never was- and those who had faith in the future were, and continue to be, on the right side of history. Here is a current perspective on why, in addition to the historical record, I am optimistic and have faith in the future.
In 1989, the Soviet Union's domination over Eastern Europe collapsed. That year, in many ways, capitalism won the battle over communism and has been sweeping the globe ever since. In China and India, and throughout Latin America and Eastern Europe, and even in places like Vietnam, free enterprise is taking root and pulling tens of millions of people out of poverty and into the “consumer class” every year. These people, who make up two-thirds of the world’s population, are beginning to buy everything from Starbucks Coffee and smart phones to flat screen TVs and BMWs. So how, in light of these global economic “mega-trends” could someone possibly have a pessimistic outlook on the future?
Let’s put is this way- if today, the World Bank published a report that last year, free market capitalism pulled 50 million people out of poverty and into the middle class, yet on the same day, some terrorists killed 40 people in Nairobi shopping mall, which of these two stories do you think will be on the 6:00 news? That’s one explanation as to why it can be so difficult for us to maintain faith in the future.
The next principle is the relationship between ASSET ALLOCATION and investment returns.
Asset allocation refers to the mix of stocks, bonds, and cash in one's portfolio. The 2018 Ibbotson ™ study reports the following annual rates of return and amounts accumulated per $1 invested since 1926:
Here is what we can conclude from this data- and this is very important to understand:
The market has delivered to investors returns proportionate with the level of short-term fluctuation they have been willing to endure.
Let me explain. In general, small cap stocks fluctuate more than large cap stocks. Large cap stocks fluctuate more than bonds. And bonds fluctuate more than treasury bills. The higher the fluctuation of the asset class, the higher returns investors have typically received for their willingness to endure the fluctuations. It’s that simple. I chuckle when I hear people say the market is “rigged.” Over time, the market is incredibly rational and efficient.
Now, I want to make a very important point. Funds set aside for emergencies or to be accessed within five years should not be in the stock market. If, for example, you are saving to make a down payment on a home or you have children within five years of going to college, funds set aside for that purpose should not be in stocks. Period.
The final principle is PATIENCE
We live in an age of 24x7 news which places us under pressure to react to the events of the day. Yet the more we focus on events of the day, the more we lose sight of our goals- and the more mistakes we make. A few years ago, an economist by the name of Richard Thaler published a report showing that the more people even looked at their investment portfolios, the lower their returns. The real test of patience comes when the market is going down. Our temptation is to get out of the market and get back in when things have “settled down.” The problem with this strategy is that it requires not one, but two good decisions- when to get out and when to get back in. Few people can do this successfully- and no one can do it consistently. Warren Buffett will tell you the same thing. So, we must expect and have patience to sit through the inevitable bear markets which occur on average every five years and use them as opportunities to add to our portfolios.
First, let’s define wealth. We tend to measure wealth in terms of dollars. However, wealth consists of all the resources we have to create a meaningful and purposeful life. Here are some components of wealth.
Our Faith- Trust in the sovereignty, goodness, and provision of our Creator.
Our Relationships- Family and friends and our business and social networks.
Our Wisdom- Knowledge, values, and the life lessons gained through experience.
Our Time- The power to choose how we’ll prioritize and live each day.
Our Talents- The natural abilities that allow us to do something well.
Our Health- Our physical, mental, and emotional well-being.
Our Money- If you are able to provide for your family the basic necessities of food, clothing, and shelter and have anything left over, then you are by the world’s financial standard, rich.
So, when we consider wealth in light of all of these resources, we come to understand our wealth can grow even when our investment portfolios are down. In fact, life’s most challenging circumstances can be our greatest “wealth-builders.”
Most people believe that wealth and happiness is achieved by accumulating enough money to have things and do things. That is untrue. Contentment based on having more and doing more is insatiable. Wealth and happiness is achieved by a willingness to use money for four purposes:
To Invest in Relationships
To Serve Others to make a difference in the world
To Engage Life with stimulating and enjoyable activities
And to Give Generously.
I believe that if we leverage wealth in pursuit of these things, we discover the meaning of true happiness. I have also come to believe that the management of personal financial resources is an issue of stewardship, not ownership. I am a manager of resources that have been entrusted to me.
So, now let's talk about stewardship and generosity. I believe true giving is not so much an act of generosity as it is an act of love. It is possible for me to be generous without love (i.e. for a tax benefit or to get my name on a plaque) but it is not possible for me to truly love without giving. So my desire is not so much that I grow in my capacity to give, but that I grow in my capacity to love.
Let’s discuss why I would want to grow in my capacity to love, and by extension, my desire to give. First, giving helps release me from the fears I have over money. Some things defy explanation and this is one of them. If I have fears over money and I give money away, you’d think I’d have even more fears over money. But the opposite occurs. It’s a real paradox. When I release my grip on money, money releases its grip on me, and the fears subside. It’s kind of supernatural. Next, giving allows me to live in the present. Fears over money always relate to the future. Will I have enough? Will I be OK? When I give, I am able to live more fully in the presence of each day. Third, giving grows my faith. When I give, I am placing my trust not in my own provision, but in that of my Creator. And finally, giving is a source of joy as I share my material blessings with others.
I’ve also learned through my own experience and by watching others that generosity is a response to gratitude. I have never met an unhappy grateful person- nor have I ever met a truly grateful person who is not a generous giver. The more I reflect on my blessings, the more grateful I am. The more grateful I am, the more I give. The more I give, the more joyful I become. It’s a cycle. So how do I grow in my capacity to love- and my desire to give?
First, I stop comparing myself to others. When I compare myself to others, I think about what I don’t have. And when I think about what I don’t have, I’m not very generous.
Next, I view the world with an abundance mentality. In my humanness, I view the world with a scarcity mentality. But, God’s economy is one of unlimited abundance. King Solomon wrote:
“One person gives freely, yet gains even more; another withholds unduly, but comes to poverty. So a generous person will prosper as whoever refreshes others will also be refreshed” (Proverbs )
Third, I set up a separate account for giving. Having a separate account is a game-changer because it frees me from constant decisions on whether or not to give. My main decision is simply to fund the account. I keep a percentage “uncommitted” for unexpected opportunities to give. So when a friend asks for support for a mission trip, of course I’ll give- the money is already there! A separate account also simplifies record keeping and tax reporting. My wife and I were recently audited by the IRS for our charitable giving and it was very easy to provide statements and documentation for every reported donation.
And finally, I teach generosity to my children- What’s more important than the legacy we leave for our kids? I want to leave my kids with a spirit of generosity and compassion for others. Here are some ideas for cultivating generosity in the hearts of the next generation.
Model Generosity. For example, be a generous tipper. Next time you take your son or daughter to Waffle House and have a $15 check, leave $25 on the table and watch the server’s response while walking to your car. Your kids will love it. We’ve actually had waitresses run out to the parking lot to tell us we made a mistake and left too much money. I just tell them they are excellent waitresses and we appreciate the great service!
Give children control over some of your family giving budget- When our kids were very young, we began to have them do research and write notes to accompany checks for charities they chose to support. Sometimes, we even had them write out the checks so their first memories of writing a check would not be to spend or even to save, but to give. As a parent, it will give you great joy to see your kids grow in their capacity to love and develop a heart of compassion and generosity.
Let’s wrap up by re-visiting three myths and the corresponding truth of what I’ve shared.
Many believe financial planning is a time consuming and complex process. That is untrue. Financial planning is quite simple. Many believe investment success is determined by the stocks, bonds, or mutual funds one owns along with an ability to predict the market. That is untrue. Investment success is determined by ones behavior, faith in the future, asset allocation, and patience. And finally, many believe that wealth and happiness is achieved by accumulating enough money to have things and to do things. That is untrue. Wealth and happiness is achieved by the quality of relationships, by serving others, by engaging life with enjoyable activities, and by giving generously.
So put a financial plan in place. I’ll even give you the napkin. Then, invest for long-term accumulation of wealth according to the principles I’ve shared. You can do it. But if you choose not to educate yourself or to put in the time to prudently manage your own financial affairs, don’t be foolish. Find a competent and trustworthy advisor and let them help you. But most importantly, don’t buy into the myth about wealth and happiness. Having more and doing more will not make you content and satisfied. In fact, it could lead to regrets and it could hurt the people you love.
Cultivate meaningful relationships, serve others to make a difference in the world, engage life with enjoyable activities, and give generously of your time, your talent, and your treasure. In closing, I want to thank my professional colleague Nick Murray, who has mentored me over the years and helped shaped my philosophy as a husband, father, friend, and financial advisor. Thanks for reading this essay. I hope our time together has helped reshape some of your ideas about planning and managing financial resources, and especially your views about wealth and happiness. May God bless you and those you love.
1, 2, 3, 4, 5- Murray, Nick Behavioral Investment Counseling (2008)
6- Geller, David Wealth & Happiness (2012)
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation to buy or sell any investment. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment decision. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Any opinions are those of Kevin Latty and not necessarily those of Raymond James Financial Services. Asset allocation and diversification do not ensure a profit nor guarantee against a loss. Individuals cannot invest directly in any index, and indexes are unmanaged. Performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. You should discuss any tax or legal matters with the appropriate professional.