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Dear ,
Difference Between Wealthy Americans and Working Americans
Years ago one of my mentors asked me a question. "What is the difference between the way wealthy Americans invest and the way working Americans invest?". Being smart enough to know that my mentor had a point he was trying to make I simply asked "What?". He went on to give me a lesson that has become one of the cornerstones of our investment philosophy and I'd like to share it with you.
My mentor said that the main difference is that the wealthy focus on not losing money first, then they worry about rate of return. That doesn't mean that they never lose money. It simply means that they focus on controlling their risk first, as much as possible. By doing so they can reduce the chance of loss to their principal. Then after controlling for risk they look to get a fair return for the amount risk they are taking. To use a baseball analogy, they are happy to sit there and hit singles all day long. They don't need home runs to try to make up for the losses of excess risk. Make sense?
For those of you who are already clients, you've heard this before because this is one of the foundations of our investment philosophy. It's kind of a turtle and the hare thing. Slow and Steady. Like watching paint dry. Boring. So why do the wealthy do it this way? Because it works.
Beating the Show Offs
I ran across an article today that I'd like to share with you. It's called Beating the Show Offs by Joshua M. Brown who runs the ReformedBroker.com website. He is an advisor to high net worth individuals in NYC and is also a regular contributor to magazines like Forbes, etc. Here is an excerpt to give you a flavor of the article.
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"I talk to a lot of potential investors about their portfolios and about some of the ways in which our managed assets might be of service to them. I'm not in the Greatest Trade Ever biz and you'll never see VRNG or PCLN in one of our models. Upon explaining our approach, I'll sometimes hear "That's it?" I suppose there's an assumption that because I'm on TV and stuff that I must manage money like a wannabe hedge fund manager or an aggressive trader.
In reality, I run retirement assets in such a way that my wealthy clients will be able to make it through to the end without compromising on their quality of life. This requires discipline, of the behavioral and emotional sort, way more than it requires any kind of overly acrobatic equity disco."
Equity disco! That gave me a chuckle. Josh has a great way of making a point. And while he and I may differ in our approaches to accomplish that goal, I think we both are ultimately saying the same thing, control risk first.
Speaking of the Equity Disco!
Now let's compare that approach to the approach of many others in the industry. I know that many people are seeing the stock markets appreciate and they feel like they are getting left behind. Missing out on the Equity Disco if you will.
As an example of this group I'm going to take a quote from Barry Ritholtz who you all know I respect. Several times in the past I have recommended his website. I stop by his site a couple of times a day and I would recommend that you do the same. www.ritholtz.com
Here is what Barry said in an article posted today called "Timing the Market?".
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"Under normal circumstances, I would have been aggressively pulling back equity exposure since, well last year. The wild card that has prevented me from doing that has been the Fed's program of QE. Having made riskless assets much less attractive, the Fed's liquidity fire hose has forced managers into equities beyond what is normally prudent."
Think about what he is saying there. Normally he would already be out of this thing but because of the games the Fed is playing he is still invested. The Fed "has forced managers into equities beyond what is normally prudent.".
Prudent. There's an interesting word. Isn't that one of the ways we are taught to judge the risks we take? Would a prudent person take that risk? Now just so we are all on the same page, let's take a look at the definition of prudent.
prudent
1. wise or judicious in practical affairs; sagacious; discreet or circumspect; sober.
2. careful in providing for the future; provident: a prudent decision.
So we have a money manager, Barry Ritholtz, telling us that he has his client's money more invested in the Equity Disco than would normally be wise. That's quite an admission isn't it? Would you want your money manager doing that with your retirement money? But let's look at what else he says.
"Today, we are equal weight equities (we came into the year overweight equities).
The Fed's impact on asset prices will eventually attenuate. Those of you who are playing along at home, make sure you have some set of parameters to alert you to evidence of when the Fed's punchbowl has gone non-alcoholic so you can reduce your equity exposure substantially.
We continue to get closer to that point, but we are not quite there yet . . ."
So he is playing a game of trying to outguess the Fed. If he guesses right it will pay off for his clients big time, but what if he's wrong? What if he misses the signs? What if that big Equity Disco comes crashing down again?
Does that really seem like a "prudent" strategy to you?
Equity Disco or Invest Like the Wealthy-You Choose!
As they say folks, there's more than one way to skin a cat. (I've always wondered where that phrase came from. I mean come on, who goes around skinning cats?) I've just shown you a couple of different strategies and I'm not saying one is right and one is wrong. That is for each individual investor to decide.
What I am saying is that you have to decide which strategy will help you meet your goals best. If your goal is to work steadily towards your financial goals while still being able to sleep at night then I think the choice is obvious.
If on the other hand you miss the excitement of the ups and downs of markets. The thrill of making a ton and then losing it back again then maybe the Equity Disco is the better choice for you.
Is It Closing Time At The Equity Disco?
Nobody knows for sure but here is last week's Chart of the Day from chartoftheday.com.
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If you're not sure what that could mean for your money, you might want to give us a call or send us an email at preames@reamesfinancial.com.
Until next week , Protect Your Wealth!
Sincerely,
  
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