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Investing "Vehicles"

March 8, 2010

“What percentage of our portfolio should we have in stocks and bonds?”

“It would be irresponsible for me to answer that question.”

What kind of financial advice is that?  It’s  exactly what I told a recent client during an initial consultation.

The media is filled with quick-fix advice on this all-important question.  Peer-reviewed studies have repeatedly shown that the best long-term predictor of portfolio performance is the proportion of a portfolio’s holdings in stocks vs. bonds.  Way down the list in importance is the specific stocks and bonds (or mutual funds) selected.  But, specific stocks, bonds, and funds are what sell CNBC ads and money magazines.  So, it’s no wonder that this is most often the question people come to financial planning sessions to answer.

However, precisely because it is so important, it’s not a question that should be answered in an hour, or even two.  Here’s my philosophy on why.

There is a reason that many financial products are called “vehicles.”  They get you where you want to go.  However, if you get behind the wheel of a “real” vehicle, turn on the ignition, and put it in drive, but don’t have any idea where you want to go, or if your only goal is just to steer enough to avoid obstacles, who’s in charge?  You, or the vehicle?  Driving a vehicle without knowing where you want to go with it is just a hunk of metal wasting gas.  It’s also dangerous.

It would seem that knowing where you want the vehicle to take us is of supreme importance before we get behind the wheel and start it up.  And, I have a list of “satisfactory” and “unsatisfactory” destinations.  On the list of “unsatisfactory” destinations:

  • Rich-Land (hint: most of us already are there.  Spend three weeks in a developing country, then come back and tell me you’re not.)
  • Maximum Growth and No Risk-Land
  • 100% Guaranteed Income-Land
  • Cake-and-Eat-It-Too-Land
  • Whatever-the-Most-My-Portfolio-Can-Make-Me-Land
  • Best-of-Everything-Land

Not only do many of these only exist in Fantasy-Land, they are too vague for any kind of meaningful roadmap.   After a while of heading for one of these destinations, the driver will find himself or herself exhausted, at the mercy of the vehicle, and not getting where they really wanted to go anyway.

What are some examples of a list of satisfactory destinations?

  • Have $X per year to support my basic living needs beginning in 2013
  • Replace my car with one like it every 5 years until I can’t drive anymore
  • Spend 3 weeks every year in Scotland beginning in 2015
  • Put my kids through private school
  • Provide sufficient support for the kids to attend a liberal arts college at age 18 if they want to
  • Buy a mountain house by 2020
  • Host my children and grandchildren on a cruise every summer beginning in 2011
  • Build my own boat by 2012
  • Establish a permanent endowment at the university music school by 2010
  • Hold a 50th anniversary party for my parents
  • Open my beachside bistro by 2015
  • Go to graduate school full-time in 2014
  • Spend 20 hours per week volunteering at the homeless shelter beginning in 2012

Fortunately, I didn’t have to make these up.  My clients provided them to me,  Some of the destinations they knew off the top of their heads.  Others took some time to realize.  But the point is, first, we did the hard work of figuring out where we wanted the vehicle to take us.  Once we knew the destinations, establishing what kind of vehicle, and whether it should have snow tires, four-wheel drive, a sunroof, a hatchback, manual transmission, tinted windows, and halogen headlights – the answers to all such questions, well, they just fell into place.  Isn’t that much better than walking up to a car and asking where it can take us?  Answer:  400 miles on a full tank of gas if it’s in good working order. So…what?

Live a little.  Answer the really hard question:  Where do I WANT to go?  Forget what kind of car I think I have and what I think it can do.  What do I need, what do I want, and what do I wish for?  Do some wishing.  And don’t worry, if the answer sounds something akin to driving to Tahiti from Tampa, a good adviser will put the brakes on.  It would be irresponsible not to.

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