November 29, 2021

Bucks: Don’t Mistake Investing Folklore for Personalized Advice

Carl Richards

Carl Richards is a financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

Most of what we hear about investing isn’t right or wrong. It’s a matter of applying what we hear to our own situation.

When we make investment decisions, they should be tied to our goals. We get into big trouble when we either:

a) Fail to get clear about our goals

b) Invest based on someone else’s goals

I’ve written before about the first situation. But as my friend Tim Maurer says, personal finance is much more personal than it is finance. We need to take the time to be really clear about our goals.

The second situation is a more nuanced situation. It can happen subtly, because a lot of what we hear and do when it comes to investing is basically based on folklore. We end up doing things because other people are doing them, and it leads to big problems.

Here are a few examples:

  • You hear that Harvard’s endowment is buying dairy farms in New Zealand.
  • You hear your wealthy uncle talking about how important it is to own municipal bonds. He has to be really smart because he’s so wealthy, right? And what he’s saying sounds so sophisticated that you think there has to be something there.
  • You hear the cool kids who just got hired out of Stanford’s M.B.A. program talking about investing 100 percent of their 401(k) in stocks. (They must be smart too. They went to Stanford!)

In all three examples, you might be tempted to change your investments based on something you’ve heard from someone else. But while dairy farms, municipal bonds and stocks might be good investments, you aren’t just looking for good investments. You’re looking for good investments that will help you reach your goals.

Your goals are not Harvard’s. Harvard’s goal is based on a different time frame, to build an endowment that will be around forever. You, however, many have goals to meet in 10, 20 or 30 years.

And your goals are not your wealthy uncle’s goals. He’s probably interested in buying municipal bonds because of his ridiculously high tax bracket and the tax-free status of the bonds.

Finally, your goals are probably different from the goals of people who just finished business school. Clearly, these young hotshots feel like they can afford to be extremely aggressive when setting up their retirement portfolios. Most of us are in a different situation.

Your goals are just that: Yours.

It’s not that Harvard, your uncle and the business school graduates are wrong and you’re right. The point is that when it comes to investing your money, the only goals that matter are yours.

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Wealth Matters: Advisers Keep Eyes on the Horizon in a Choppy Economy

Given that this has already been a year of political and financial upheaval that none of these people had anticipated, this advice may be the only viable option. Still, each had his own take on how the long view would look.

Richard Cookson, chief investment officer at Citi Private Bank, has been the contrarian throughout. He admitted that he made the wrong call on the United States stock market this year, predicting that it would go down when, in fact, it went up. But he said that increase in value was meaningful only if you had invested in dollars.

“The U.S. is a wee bit like the emerging market countries in the 1990s in the sense that it has been debauching its currency,” Mr. Cookson said. “The stock market does well in the local currency, but it does very badly in any other currency’s terms. If you bought it in euros or Swiss francs and didn’t hedge it, you would have done appallingly.”

Niall J. Gannon, director of wealth management at the Gannon Group at Morgan Stanley Smith Barney, has been the steady member of the group. He has continued to ignore the noise and focus on the data.

Mr. Gannon’s preferred measure for his high-net-worth clients is to analyze the earnings yield of various securities. (This is defined as the earnings per share over the previous year divided by the current price, or the inverse of the price-to-earnings ratio.)

Mr. Gannon said he was looking at stocks with earnings yields of 7.5 to 8 percent, which compare favorably with 4 percent on United States Treasuries and 4.65 percent on municipal bonds. “We continue to stress that you have to extract value where the value is coming from,” he said.

The five advisers were in accord on the outcome of the deficit talks between Congress and the White House. All predicted that the politicians would find a short-term solution that would leave the country in the same predicament a few years from now.

They also agreed that the politicians in Europe would probably come up with a short-term solution for Greece’s debt problems, but they disagreed on the potential impact of Greece’s situation on Europe and the rest of the world.

So let’s look more closely at what the group thought was good and bad in the first half and what its concerns were for the future.

HALF TIME At the end of the last quarter, two unexpected events upended the group’s predictions: the turmoil in the Middle East and what it might do to oil prices, and the tsunami and earthquake in Japan and how that disaster affected the global supply chain.

The price of oil spiked to $114 a barrel but is now back to about $96. (And while the price of gasoline has edged down in recent weeks, it is still higher than it was in December 2010.) Japan, meanwhile, appears to be on the road to recovery. But none of that could be known as it was occurring, and the way some investors panicked again showed just how fragile confidence was.

Mr. Cookson said he was proud of his call to buy Japanese stocks as a way to invest in the country’s quick recovery.

Marc D. Stern, chief investment officer at Bessemer Trust, said the fall in gas prices had helped increase consumer spending.

Now, though, the group is making the case that investors need to remain confident about the United States stock market. Mr. Stern said that there had been five stock market drops of at least 7 percent since the March 2009 low, including the most recent one from April to June. But he argued that those drops were the results of broader economic shocks. Corporate profits remain strong.

“It’s remarkable how companies are taking advantage of rising world trade, improved business opportunities and increasing capital availability,” Mr. Stern said.

While this is good news for companies and their shareholders, it has yet to make a dent in the unemployment rate. No one had a firm prediction of when the rate might fall. Mr. Stern framed it as a chicken-or-egg case: companies will start hiring when other companies hire.

Mr. Gannon said high unemployment had not affected his investment decisions. Those decisions are focused on the growing middle class in other parts of the world, which is why he continues to invest in companies like Coca-Cola, Pepsi and Nike, which derive their revenue globally.

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The Boss: From a Crisis, Opportunity

My high school guidance counselor steered me toward engineering because I excelled at math and science. Engineering grads were getting six to eight offers each, but by the time I graduated from Georgia Tech in 1983, job prospects had slowed. I turned down a job with a construction company after I got an offer from General Dynamics to work in Atlanta for its electric boat division. I worked on noise mitigation for submarines.

I found I was more interested in management than pure engineering, so after two years I left to attend the Wharton School at the University of Pennsylvania for an M.B.A. Management courses, however, didn’t captivate me. I was most comfortable in finance, with its mathematical answers that weren’t open to case-study debate.

I started on Wall Street in August 1987. Black Monday occurred two months later, and large financial firms started laying people off. I learned that business is cyclical and that out of crisis comes opportunity. Over the next 10 years, I worked for several companies, including James J. Lowrey Company, a financial advisory firm.

In 1996, Napoleon Brandford III and I were working together when Muriel Siebert, who owns a discount brokerage firm and was the first woman to buy a seat on the New York Stock Exchange, approached us about starting a municipal finance firm together. Muriel and Napoleon asked me to be president and C.E.O. It has turned out to be a perfect role for me, working in tandem with Napoleon, the chairman.

Our company underwrites municipal bonds that cities issue to finance major infrastructure projects. Our industry has had a few great years despite the financial crisis of 2008. While some large firms downsized, we increased our staff by a third. In the first two months of this year, however, industry volume was less than half of what it was a year ago.

Last year, we were among the top 10 municipal finance firms in revenue, a first for a minority- and woman-owned company. Increasing our staff in 2008 helped fuel our growth.

Municipalities are struggling today as they deal with fiscal crises. But they’re engaging in layoffs and cutting services in an attempt to balance their budgets. I believe that reports of possible enormous defaults are overstated. The municipal sector has been known for its safe investments. Lower-rated credit, in the nonrated or junk-bond range, and credit barely investment grade, are vulnerable; that’s why these investments pay a higher yield.

In 2000, when working in Detroit for our company, I was co-founder of an internship program, the Detroit Summer Finance Institute, which exposes inner-city students to finance jobs. People often view the municipal finance sector as less glamorous than the corporate one. Young people, especially, don’t always realize how rewarding work in this field can be. We have offices in 22 cities. I see the impact of our work in many cities — from convention centers to highways to educational projects.

At a recent event, a couple of people who learned I was in finance wanted to sit next to me for personal investment advice. The fiscal crisis facing some municipalities had them worried about their portfolios. I’ve never been so in demand for investment advice. 

As told to Patricia R. Olsen.

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