Yogi was one of the great personalities of our time transcending the sport he played in. He has the most World Series rings of anyone, probably had the lowest percentage of strike-outs to plate appearances (about 5%) of any full-time player; was a three time Most Valuable Player and an All Star 15 times; served America admirably in World War II; and his colloquialisms have become part of our language and lore. May he Rest in Peace!
Following is some of his number sense we can enjoy:
You give 100 percent in the first half of the game, and if that isn’t enough in the second half you give what’s left.
I usually take a two hour nap, from one o’clock to four. // When asked what he did in the afternoon of a night game.
If the fellow who lost it was poor, I’d return it. // When asked what he would do if he found a million dollars
Ninety percent of this game is half mental. // Yogi Berra explaining the game of baseball
You’d better make it six. I don’t think I can eat eight slices. // When asked how he wanted his pizza cut
I believe it is important to have a diversified portfolio, but not in the usual manner that is recommended by many financial advisors. I do not believe multiple asset classes are effective in helping investors attain their long-term financial security which, when all is said and done, is the objective of investing. I prefer investments in the major asset classes of stocks and fixed income that provide steady cash flow.
Stocks can be well diversified by an investment in the major index funds. Fixed income can be handled with insured bank certificates of deposit and individual bonds.
The stock, or equity portion of your portfolio, can be apportioned over the major index funds such as the DJIA, S&P 500 and Russell 2000. This provides broad stock market coverage and diversification as well as foreign exposure since about 40% of the revenues of the S&P 500 companies are out of the United States.
CDs are quite satisfactory for up to five years, and especially if they are somewhat laddered to grab a little higher yield. If you stay under the insured limits, your funds are fully secured. Going beyond five years becomes harder since I recommend individual bonds. I’ve written a few blogs on how to do this, but to repeat about diversification, I would not put more than 10% of your fixed income allocation into any one company or more than 20% into any one sector. A good bond broker can help you select the bonds or if you are more of a do-it-yourselfer you can search the inventory of many of the on-line brokerage firms. My most recent bond blog is here.
Right now you can put together a stock portfolio paying about a 2% dividend with potential capital gains growth; while you can construct a fixed income portfolio paying about 3%. This has to be balanced against your eventual cash flow needs keeping in mind that inflation will erode future spending ability.
There are other issues such as the allocation between equities and fixed income; determining the amount of cash flow you need; your current and future saving and spending behavior; the timing of when income and principal withdrawals will start and where they will come from; whether and when re-balancing should be considered; and the actual selection of the indexes or whether you prefer actively managed mutual funds; whether you will engage an investment manager; how all of this fits into your long-term goals; your emotional involvement or detachment; and a caution to not assume a greater risk than you need to accomplish your goals.
Investing is certainly confusing and difficult and because of this, many abdicate the decision making process looking for someone that will provide a quick fix. I believe my recommendations are easy to understand and follow if a little bit of focused effort is made. You are dealing with the responsibility for you and your family’s ultimate financial security and I think that should have some energy and active involvement by you. Further, my ultimate rule of never investing in anything that you do not fully understand can be easily put to use in this process and by using my blogs as guidance and as a resource.
My last blog gave 23 investing risks and tips on how to minimize those risks. The overriding tip was diversification, so I want to elaborate on that here and in my next blog. Diversification is a method of spreading, offsetting or hedging risk. This means that you do not have a high percentage of your total assets concentrated in one type of investment.
A blog providing an analysis showing the importance of diversification was posted on Jan 22, 2014 which gave the range of gains and losses for the DJIA components over a 14-year period. That is a good starting point to understand the importance of diversification, but, there is more to consider.
Diversifying can reduce risk and losses, but it can also reduce gains. Here is an example: Assume equal investments in two stocks where one goes up 2% and the other goes up 30% providing a 16% average. That is pretty good – actually very good. However, suppose those stocks went down 2% and 30% giving an average negative return of 16%. That would be pretty bad. Without the two stock “diversification” and if the stock with the 30% change was the only stock invested in, you could have suffered a devastating 30% loss rather than a pretty bad 16% loss. This indicates the importance of spreading risk by owning multiple stocks.
On an entire portfolio basis, one way of offsetting, reducing or mitigating losses would be to find investments that would go up when others drop. The choices could be between stocks, bank certificates of deposit, bonds, and possibly commodities, real estate or alternative investments.
Now, we have some fallacies to this. To be a true hedge or to provide meaningful diversification there would need to be offsetting amounts. That means that if half are in one type of investment, the other half should be in the other; alternatively if a portion would experience a loss of a certain dollar amount, then another portion or portions would have to have dollar gains of that same amount. In most cases, this might cause much too much of an asset class exposure in your portfolio. An alternative could be to come up with ten or twelve offsetting types of investments so not too much would be in any one class, so large changes in one or two would not greatly affect the overall portfolio performance. In reality, if 10% of your portfolio increases or decreases 10%, the effect on the entire portfolio is only 1%.
Another thought is that when markets crash they tend to bring everything down together. That happened in 2008-2009. While every stock market sector, style and index tanked and U.S. Treasuries increased, many corporate bonds also went down (and as I’ve previously written, the Treasury increases were illusory). Also, for the hedge to work, you might have needed to start out with a larger proportion in bonds than stocks, which over long periods would create a drag for those looking for long term growth (which has occurred).
Keep in mind that at the end of the day, true diversification, if it can be found, will have everything moving toward the mean with a high degree of portfolio safety but also with a very low cash flow and growth. Because of this, I do not think of diversification in the sense of how most people consider it is workable. My next blog will offer some suggestions.
There are many types of investment risk. The more you understand the risks, the more secure you will feel. Each has its own characteristics and degree of importance.
An investor must understand each type of risk and use that knowledge to create a portfolio of investments that balance the level of risk assumed, with the desired investment return. How you invest and how much you understand is a big part of managing your wealth in a way that makes you feel secure.
Risk and reward go hand in hand. Usually the greater the risk an investor is willing to undertake, the greater the potential reward… or loss.
It would then seem that the smaller the risk, the less the yield, but the higher degree of safety for the investment. However, there are many types of risk that apply to almost every investment and unless they are understood, the investment might not be appropriate for the needs of the person making the investment.
The following are many types of risks and a TIP to mitigate or avoid that risk: This is serious business and each needs to be considered when you are deciding on your investments.
If it appears that I am trying to scare you, well, maybe I am. You should be very careful with your decisions and always consider what would happen if what you do turns out wrong.
- Market Risk – This can be defined as the possibility of downward changes in the overall stock or other market. This does not relate directly to the individual investment, but to a more macro environment. An example is where the entire stock market drops as a result of the Federal Reserve Chairman suggesting that the Federal Reserve might raise interest rates. TIP: One way to deal with market risk is to diversify your investments over various asset categories and also within those categories such as stocks, bonds, cash and real estate and other categories. Holding assets from different categories reduces the possibility that all investments will be down at the same time.
- Inflation Risk – For many individuals, safety of principal is the primary goal when deciding where to place investment funds. Such investors frequently put much of their money in bank savings accounts, CD’s or U.S. Treasury Bills. While such investments can provide protection from market risk, they do not provide much protection from inflation risk. An investor may hold the same number of dollars but, over time, those dollars buy less and less. Most methods of shielding your portfolio from inflation risk involve you in a higher level of risk. Placing a portion of your assets in the stock market, or buying long term bonds presents a greater risk than short term fixed income investments. TIP: One way to reduce this risk and still keep a conservative portfolio is to ladder your bonds and CDs.
- Credit Risk – Also known as default risk. This reflects the chance that the issuer of a bond or other debt-type instrument will not be able to carry out its contractual obligations. TIP: Keeping maturities short, diversifying investments among various companies and investing in institutions and issues of the highest credit rating are methods used to control this type of risk.
- Liquidity Risk – This recognizes the possibility that an investor will not be able to sell, or liquidate an asset, without losing a portion of the principal because there is an imbalance between the number of buyers and sellers, or because an asset is not traded very often. TIP: Choosing investments traded on an active market and limiting investments to funds not needed for current expenses are approaches used to lessen this risk.
- Interest Rate Risk – The risk that an increase in the general level of interest rates will cause the market value of existing investments to fall. Generally, this risk applies to bonds and other debt-type instruments, which move opposite to interest rates. As interest rates rise, bond prices tend to fall and vice versa. In the case of interest rate risk, time is a factor. The longer the time before maturity, the greater the potential for fluctuation in the value of the bond. TIP: One approach to reducing this risk is to stagger, or ladder the maturities in the portfolio so that a portion of the portfolio matures periodically, rather than all at the same time. Buying bonds you intend to hold, and can hold, until maturity, at which time it is redeemable at full value, eliminates this risk.
- Tax Risk – The possibility that a change in tax laws, at either the federal, state, or local level, could cause an investment to no longer meet an individual’s requirements. This has occurred many times. In particular the 1986 tax law effectively ended tax shelters AFTER Congress specifically enacted certain tax laws to encourage the private sector to invest in rehabilitating run down urban neighborhoods that the Federal Government wanted done, but did not want to appropriate funds directly from the Federal Budget. Other laws subjected Keogh plans to estate taxes when it was specifically excluded initially, have substantially increased capital gains taxes up to just under 50% for a number of years, taxed Social Security payments, “taxed” municipal bond interest to the extent it triggers a tax on Social Security earnings, and the Alternative Minimum Tax voids many payments of State and Local income and real estate taxes. TIP: Making an investment because it’s a good investment, rather than a good the tax saving devise, is an excellent way to reduce this risk.
- Economic Risk – This is the danger that a downturn in the economy or other significant economic event will depress the value of your investments by reducing earnings capabilities. TIP: Here diversification over broad categories and possibly foreign investments that do not cycle in tandem with each other can cushion against this.
- Specific Risk – Relates directly to the individual investment itself. This covers such elements such as new technology making a certain firm’s products obsolete, greater competition reducing earnings capabilities, management changes, recalls, product liability claims, and bad accounting data. TIP: Diversification is the way to reduce this risk on your total portfolio. This is a reason why many people invest in mutual funds and index funds – specific risk is spread over a large number of companies.
- Forecast Risk – Many times a stock rises because of anticipated increases in earnings or other good news. When the forecast fails to materialize the stock drops, and often to a lower level than where it started out. Stocks can also drop when the forecast is met because the anticipation is that the estimate will be exceeded. TIP: Diversification is a solution.
- Fashion Risk – Things go in and out of style. Investments are no different. When choosing investments do not be swayed by what happens to be in style at that moment. Choose companies that have established solid reputations and don’t look for the current flavor of the month. Asset group investing is a popular “fashion.” If you put a disproportionate portion of your assets in a particular sector, you will be overexposed to risk if that sector goes out of fashion. TIP: As with some many other types of risk, diversification is the way to mitigate the effects of this risk.
- Timing Risk – You could be completely right, but act too early. Acting too late is not a timing risk – it is a mistake. TIP: The way to guard against this is to develop a plan that will be implemented over a period of time and stick to it. The vagaries of the market will be evened out. Market timing is not an effective strategy.
- Time Risk – Not the same as timing risk. Here your investment horizon changes, or you needs change and you have to liquidate an investment. In that case you will have to take what the market offers, which could be considerably less than had you waited until maturity or the length of time you originally planned to hold that investment. TIP: The way to protect against this is to have a good thought out strategy that takes into account the possibility of changes.
- Investment Manager Risk – This is the risk that the person managing your investments, or advising you, leaves, changes, or reverses their goals or style, and does so in a manner not consistent with what you thought you were getting. TIP: To protect yourself against this is to have more than one advisor with each being a member of your team. Another way is to spread your investments over different mutual fund families. Also, looking at the long term strategy of the manager rather than the current track record and personality can help you. You should also remember that the market has no memory and a great track record is no prediction that it will continue. On the contrary, that great track record may have had the investment run up too much, leaving little potential for growth and a large potential for a drop.
- Health risk – There is a risk that your health will change requiring a drastic alteration of your investments and cash flow needs. TIP: Your investments should be set up to provide a secure cash flow base to cover many eventualities including the need for a complete refocusing.
- Loss of market confidence risk – This is the general fear the market is disintegrating and there is a rush out of the markets or money rushing away from certain types of stocks [such as financial institutions] or money rushing into complete safety of Treasury Bills providing even a negative return such as we have seen in October 2008 –March 2009. Other instances are the loss of confidence in the prices of certain sectors such as we have seen in the drop of many the NASDAQ stocks in 2000. TIP: Partial protection is to have diversification with no heavy concentration in one area, sector or type of investment. A pre 2008 “conservative” portfolio of primarily financial institution bonds was a prescription for disaster the end of 2008.
- War or terrorism risk – A completely unexpected irrational event could cause markets to be closed, liquidity curtailed, extreme uncertainty of future conditions, and panic selling. Whether the markets correct themselves or not, short term activity can be greatly affected. TIP: Protection against this is to have ready cash and available funds to meet short term needs. Some would even suggest some gold on hand.
- Warren Buffett risk – This is where Warren Buffett (or Berkshire Hathaway) or another person with similar “clout” makes a tender offer to acquire a company and there are no competing offers because no one wants to antagonize him. Believe it or not, this has happened! This reduces the upside potential from competing offers or bids. TIP: A diversified portfolio will protect you from this having a meaningful effect on you.
- Politically correct risk – Massive stock positions could be sold precipitously because of perceived unpopular activities by a company. An example could be a company that is doing research in areas that certain groups perceive as being for immoral purposes, or that they are not “green” enough, or employ child labor. TIP: The recurring theme of a diversified portfolio protecting you should be heeded.
- Devaluation risk – Currency devaluations are occurring regularly throughout the world – either politically or economically. A devaluation of the dollar can instantly reduce the buying power of savings and investments. Devaluations are relative to other currencies and the interlocking economic activity must be understood. Many advisors suggest investing globally but many major United States based companies do half of their business off shore eliminating the need for separate foreign investments, and the risk or insulation from a strengthened or devalued U.S. dollar is included in those investments. TIP: Your protection should be with a well-diversified portfolio that possibly should include some foreign stocks and bonds, but also the knowledge of what percentages of activity the companies in your portfolio (either with individual stocks or bonds or through mutual or index funds) have in other countries.
- Madoff risk – This is the risk that you are cheated either from a Ponzi scheme or your broker or advisor. Many people don’t realize it but many of the giant brokerage firms and mutual fund managers have been fined billions for “cheating” their customers by steering them into the wrong type of or inappropriate investments or into their own mutual funds that had subpar performance. TIP: It is very hard to protect yourself from someone you know and trust who is intent on cheating you. A way to partially protect yourself is to understand what you are investing in and how you can make and lose on the investment, and what interest the advisor has in it, if any. Also, you need proper due diligence going in and adequate oversight while you are in the investment.
- Category risk – the company is in a category or industry that drops out of favor reducing valuations. An example of an out of favor category is magazine or newspaper publishing; and in favor categories such as social network and e-commerce businesses. TIP: broad based diversification protects from this.
- Fiscal Cliff risk – a brand new one. This is where Congress acts totally irresponsibly, irrationally and with no consideration of the electorate they serve and the commonweal of the country. Compromise is important in legislation but when political considerations overshadow the real problems and no one steps up to address (or even define) the real issues, we have a problem. When spiteful small minded mean spirited people govern (from both sides of the aisle) we have a problem, and this is represents a great risk we need to be aware of. TIP: Taking a long view and investing in a well-diversified manner based on your goals can protect you from this risk.
- Resource drag risk – This risk occurs where there are insufficient resources available to satisfy demand. Shortages can be caused by many reasons including local wars, labor and capital shifting to the then current higher profitable areas, new products using up present supplies, or a simple bad judgment in anticipating demand when scheduling production. Whatever the reason, shortages can cause user company values to drop TIP: This, like most of the risks, need diversified portfolios that are constructed to achieve long term objectives.
All these risks need to be considered. Sound investment review, understanding, questioning, diversification and matching with your goals and strategies will serve to reduce these risks, but can never eliminate them completely. Basically, there is no way to invest that is entirely risk free; but by doing the right work and using the right team of advisors, you can reduce many of these risks.
An ethical will or statement of values contain concerns that you want your children, grandchildren or other heirs to know, learn from or be aware of. If you prepare such a statement, you should leave it in a place that would be looked at as soon as practical after your death.
Besides written documents, some people video or audio record themselves and their requests and charges.
Two people come to mind when I think of letters explaining personal values and “where I came from” or “how I got here” adventures—Benjamin Franklin and Randy Pausch. We all know who Benjamin Franklin is—just look on the $100 bill, or the back of the $2 bill (he is shown there signing the Declaration of Independence). Franklin wrote his autobiography in a series of letters to his son and then grandson to explain his beginnings and how his values developed throughout his formative years until he was in his 50s—he lived to be 84. He did not cover his public activities that they either knew about or would otherwise find out. The letters were made public after his death by being published as his autobiography by his grandson. The letters were intended for his family to influence them to follow good practices. Randy Pausch, a college professor, wrote The Last Lecture after he found out he was dying and wanted to document his thoughts for his young children. Both books are excellent and highly recommended.
You can do something similar. Buy a notebook and start writing. Spelling and grammar shouldn’t be a concern. Put down your thoughts in any order you want. Once you start writing, the ideas, memories and points you want to make will flow off your pen (or computer keyboard or digital recorder, if you wish). The more the merrier and rambling is permitted and probably preferred since your personality will show through and be reflected to the reader.
Other examples of ethical wills or advice could be found in the Bible. Isaac and Jacob each gave final blessings to their children about their future activities. Moses gives a final exhortation to the Israelites just before he dies, when they are ready to enter the Land of Israel. Jesus words in John (14:15-17); Polonius’ famous speech to Laertes in Shakespeare’s Hamlet; and the final page of The Good Earth by Pearl Buck where Wang Lung tries to tell his sons the importance of keeping the land, are all excellent illustrations of a parent’s concern for his children’s future.
Following is a brief listing of some of the things you can relate to your descendants.
- Your best accomplishments
- What you would have liked your best accomplishment to have been
- Your regrets
- Experiences you have learned from that your children wouldn’t have known about
- What you would have done better that would have made your life better
- Experiences and/or people that have molded you or had a strong impact on you
- What you want for your children
- Things you value
- Things you believe in
- Religious feelings
- How you felt when you first found out you were going to die (or had cancer, or needed heart surgery) or when you woke from an emergency operation or a terrible accident
- What you would like said in your eulogy
- Favorite quotes
- Some books that might express your feelings
An excellent book on the topic is Ethical Wills, 2nd Edition: Putting Your Values on Paper by Barry K. Baines, M.D. This book contains a chapter on Living Wills and an appendix with extensive samples of Ethical Wills and Values’ Statements. Another recommended book is Tuesdays with Morrie: An Old Man, A Young Man, and Life’s Greatest Lesson by Mitch Albom.
A recommended novel by a bestselling author that gives examples of final letters and circumstances that caused their writing is One Summer by David Baldacci.
Hank Greenberg, the baseball great left an eloquent love letter to his wife telling her not to grieve because he had lived “a wonderful life” and part of it was his good fortune to have shared 25 years with her. He also said he thought he had done what he was supposed to do with his life. What a nice final letter! (From Hank Greenberg: The hero who didn’t want to be one by Mark Kurlansky.)
There are services that create a record of a person’s life and preserve it on a DVD, CD or bound volume. To get an idea of what can be done go to www.lifestoriesremembered.net .
Reprinted from Getting Your Affairs in Order by Edward Mendlowitz, CPA. Available from Amazon.com and BN.com
Understanding what happens regarding your affairs and why is essential. Unfortunately, many do not have a clue. A reasonableness or sanity test is an effective way to review results and this applies to all of your activities.
When your investments rise or fall you should be able to grasp a reasonable explanation rather than believing it’s the effect of the herd stampeding…temporarily. Also, all changes should be related to how you are affected based on your goals and long-term plan. Think about it and focus on it – it only takes a couple of minutes – and see if what is occurring is reasonable and temporary or not reasonable and possibly a permanent shift in the paradigm.
When reviewing a business’ financial results, say increases or decreases in sales, relate it to actual quantities sold, number of orders shipped or how the production line was able to process the additional quantities. See if it all makes sense. If there is an inventory build-up, ask why and of what specific items and when they are expected to be sold. If presented with a larger or smaller [Ugh!] bank account balance… ask about the cause for the change. If you are told you are getting a much larger than expected tax refund [Yea!] ask why – perhaps you made much less than you planned [Ugh!]. You might have been told to pay more in estimated taxes than you should have been. This might mean that your taxes are being mismanaged.
When a business is valued, there can be dozens of calculations presenting many different valuations, but are any realistic in that the owner would really sell for that amount and a buyer would actually purchase at that value? A sanity test should give a sense of what might occur.
Buy-sell agreements often have valuations that are too low or too high, usually through neglect over the many years since the agreement was executed. If too low, well, the remaining owner certainly doesn’t lose out. But, suppose it is too high? How is the remaining owner to make the payments? And, if they cannot or do not want to be stuck with an unrealistic payout, might I suggest that the seller possibly would not be paid amounts they are counting on? These amounts should be given a periodic sanity test.
Many organizations cannot have more than five or six essential items that are mirrors into their overall health and success. Identify, quantify, get and use them and look at what they represent for reasonableness – each and every day because that is how often you should get them.
The bottom line is this. You need to understand what is going on with your affairs, relate changes to what is really happening and understand what it means to you, understand the consequences and question changes that do not seem logical.
Rosh Hashanah is Monday and Tuesday. Rosh Hashanah is when Jews pray for a healthy and happy year. Also, we read from the Torah about Abraham’s two sons – Ishmael and Isaac.
God tells Abraham that His words will be transmitted through Isaac; but also that Ishmael will rise to be a great power.
While Isaac and Ishmael were separated at that point, they came together after many years, in peace, to bury their father Abraham.
Today, 3700 years later, descendants of these two brothers are at war with deep hatred without any evident prospect for reconciliation. At this solemn time of year, I pray that there can be peace and brotherhood between the families of the sons of Abraham.