Thursday, August 4, 2011

Driving and Investing

Getting Measurements Protects Drivers & Investors From The Unexpected
                                                                                    By: Brendan Magee
Wednesday morning, I am driving to the post office. As I am nearing an intersection a woman tries to make a left hand turn in front of my car leaving me no time avoid hitting her car. From that point on, I have to deal with all the headaches that go along with a car accident, the police, filing a claim, getting a rental  car, etc.
Most importantly nobody was hurt. Although shaken up, both myself and the other driver were able to get out of our cars and walk and talk without any problems. So all and all, things worked out o.k., and what can we attribute this to? I was driving at the appropriate speed limit. How did I know that? The speed limit signs were posted, and my speedometer told me how fast I was going. If I don’t know how fast I am supposed to be going and have no idea how fast my car is going, I am not in control of my car, and when the unexpected happens  (a car pulls out in front of me) a minor aggravation could turn into something a whole lot more tragic.
The same can be said of investing. When you do not have mathematical measurements of how diversified your portfolio is or how much risk is in your portfolio, you are not in control of your portfolio., and when the unexpected happens, like the housing crisis or the debt crisis or the tech stock crash something that could merely be a temporary minor aggravation turns into something you can never recover from.
For most  investors the knowledge of being able get a measurement of how diversified their portfolio is or how much risk is in their portfolio is kept from them. By who?  The brokerage houses and the mutual fund companies.  The reason? The investment industry’s agenda and the investors agenda are completely at odds with one another.  While the investor wants to avoid the consequences of unexpected traumatic events, those events are the time when the investment industry can introduce a whole new set of products to alleviate the problems investors are experiencing.
Think about it. Since 2008 how, many advertisements for gold have you heard or read? How many times have you heard someone tell you how foolish it would be to leave your money in stocks, bonds, or mutual funds? Don’t we hear a lot about how there are lots of investments out   there that give you stock market rates of return without any risk what so ever? Certainly, you have seen advertisements where you will be taught how to buy homes that are in foreclosure at rock bottom prices.
I read a W.C. Field’s quote that read, “Never smarten up a chump.” It does not pay the investment industry to let you know about things that put the investor in control of their investments. Imagine if today you found out your 401k plan with all the different names of the funds had you with 70% of your money in U.S. Large Company Stocks? You would know in two seconds your portfolio was dangerously lacking diversification and you’d fix that problem.
Imagine if you had a way to measure the success or failure of your portfolio? Imagine if you could see for the risk you were taking you were not getting the appropriate level of return, or if you could increase the return while at the same time reducing the risk? Imagine if it was no more complicated than looking at your speedometer? Now you’d be in control, not perilously in the dark about your investments.
The plain and simple truth is that these capabilities have been around for at least the past twenty years,  if not longer. These capabilities come from 70 years worth of academic Nobel Prize winning research and have been kept for the most part from investors.
Could you imagine if all those people who are reaching retirement age now and realize they can’t afford it because their portfolios needlessly suffered through the 2002 and 2008 had been fortunate enough to get their hands on this technology? Imagine if a 50% loss was a manageable 17% loss which was easily recovered in the rebounds that took place? Imagine if the person who lost unexpectedly lost 25% had gotten a measurement of how their portfolio should perform over their lifetime? Imagine if they saw that the loss was within the normal parameters and did nothing. They didn’t move their money to an indexed annuity and from that point on just break even with inflation over the last 10 years?   Imagine if they weren’t  forced to take that part time job just to make ends meet? How different would life be?
The plain truth is this. We have no idea what tomorrow will bring. Sometimes tomorrow brings joy. Sometimes it brings tragedy. No matter what though we will be in much better shape to deal with it if we have measurements of where  we are today. For drivers we have a lot more peace of mind, if the gas tank gauge tells us how much gas we have or if we have measurements of how much oil is in the  engine. With measurements, those critical issues are easily handled, and we don’t find ourselves stranded at night or in a blizzard.
Likewise, investors need to have measurements of how much risk they have in their portfolio. They need to have measurements of how diversified their portfolios are. They need to know what they should be expecting in returns for the risk they are taking. Without it, they are not in control. Without control there isn’t any true peace of mind and what can be minor very manageable bumps in the road can easily turn into tragedies with life altering consequences.
Brendan Magee is the founder and president of Inevitable Wealth Coaching in Drexel Hill, Pa. With questions, comments, or suggestions call 610-446-4322 or e-mail Brendan@coachgee.com.

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