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Invest Like You are Fishing: Patiently

With our constant exposure to the media, whether on TV, the internet or social media, we are always in touch with what is going on in the world.  In that same vein, we are also constantly force-fed everyone’s opinion. Everyone is an expert.  This is especially true in the financial world.  Someone is always calling for the next market crash, while someone else is always calling the start of the next big rally. It is very easy to get caught up in the tug and pull of various pundits and start questioning what we should all do with our money.  With all of this noise out there how do we make proper financial decisions? The key is to invest the same way we fish, patiently.

Now I don’t want to confuse people here.  I’m not saying we should always just wait things out or not make quick decisions if something truly market moving occurs.  I am saying that for the long term investor, investing patiently is one of the major keys to success. So what does investing like a fisherman really mean?

Volatility will happen: It is human nature to be driven by fear and greed but as an investor letting these be the driving forces behind your decisions can be dangerous. It is important to understand that volatility will happen and it is normal. Historically the S&P 500 has a standard deviation of just below 15%. In simple terms that means that 68% of the time the annual return will fall within 15% of the historical average mean of 9.8% (a range of -5.2% to 24.8%) and approximately 95% of the time, the return will fall within 2 standard deviations (-20.2 to 39.8). Since 1928 the total annual return has only finished between 5 and 10% 6 times. Sorry for getting technical but it is important to understand that markets rarely march higher in a straight line.  The market experiences fluctuations in both the positive and negative directions. If market volatility is keeping you up at night that isn’t an indication that you should just sell everything.  It is an indication that you need to rethink your entire investment plan and realize you may have a lower risk tolerance than you thought

Don’t make rash or emotional decisions: Volatility is only one of the many variables that may drive your investment decisions.  The patient investor doesn’t let volatility or any other variables force them into making a quick, emotional decision.  Emotion can be a very powerful force in all aspects of life but should be moved to the side when making financial decisions.  Emotion can easily cloud rationality and put you in a position where you are not evaluation a situation based on all the facts.  As an investor, if you feel yourself making an emotional judgment about something it is important to take a step back and think about why you bought or sold something in the first place.

Selloffs are normal: I have written about this at length recently. It seems that with the current market conditions we have seen, people forget that selloffs happen a lot and they are normal and healthy for the market. Historically speaking a pullback of 5% happens 3 times per year on average and a 10% correction happens approximately once per year. Further, we can expect to see a 20% correction around every 3.5 years. As you can see, this kind of volatility should be expected and should not be a cause of panic selling. The patient investor will use these market pullbacks as a time to buy quality stocks at a discount. They won’t react with panic and make an emotional, fear based decision.

A fisherman understands these tenants. They understand that they can’t always predict where the fish are going to be, when they will be biting or what the weather is going to be but they know that if they keep their line in the water for long enough they will eventually catch something. They know that patience will eventually pay off. The seas may get rough along the way and may even scare other fisherman away but that just leaves more fish for them.  If the seas are too volatile for them to stomach than maybe they shouldn’t have been fishing there in the first place.

So what does this all mean for your investment plan? Unless you plan to trade in the markets every day, patience can be your strongest ally.  The ability to take a step back from your portfolio and assess it with a wider lens prevents you from getting caught up in the day to day or week to week market volatility and the news and opinions that come along with it. Being patient allows you to weather the downswings so you don’t miss out on the recovery or another upswing. It also allows you to make more disciplined investment decisions that aren’t driven by fear or greed.

We all don’t have an infinite time frame for our portfolios. If we did, we could withstand any market turmoil. But since we all have goals, dreams, and aspirations for our money, it is important to be as patient as possible with our investment decisions.  We should let our long term investment and financial plan be the driving force behind the major changes we make in our portfolios and not let short-term noise dictate our allocations.  If you or your goals can’t afford a short-term pullback in your portfolio than you shouldn’t be taking on the level of risk you are taking and should just stay out of the water.

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You Sold Your Company: Now What?

I’ll start by clarifying one thing, this post isn’t just for people that have sold a company. As much as we hear about company acquisitions in the financial news, selling a company is pretty rare. With all of the entrepreneurs and start-ups in the world, the actual number of companies that grow to a point of acquisition is tiny and most of the ones that do sell are not your Snapchats and Instagrams that reach rapid, almost overnight, success.  They are companies that grow gradually over time, maybe even being passed down through generations before being sold. With that said, the lessons from this post can also be applied to other transitions in life.  It could be a windfall from an inheritance, the realization of profit from stock options or even a simple transition to retirement.  In any case, the planning that you do leading up to, during, and after such an event can have a vast impact on the success of the transition and your future goals.  This applies not only to the financial side of things but also to the emotional transition people experience.

So, you sold your company. Congratulations. You worked your butt off and now you are about to reap the benefits. You can kick back, relax and spend the rest of your days lounging on the beach, sipping pina coladas. As idyllic as this may sound to some, this is not reality.  Yes, you have some new found wealth, more flexibility in your schedule, but you still have work to do.  Transitioning from building a company to life after the company isn’t like flicking a switch.  You need that new wealth to provide you with income. You need that new wealth to last for the rest of your life.  All this while adapting to a life where the main focus isn’t the company anymore.  Many people I work with struggle with this emotional part more than any other.

So how do you make this transition successful?


Just because your company is in the growth phase and hasn’t sold yet doesn’t mean there aren’t strategies that can be implemented to benefit you and your family in the long run.  During this time frame it is important that proper ownership of company stock is reviewed and that steps are taken to create a transition plan.  There should be a plan in place to make the transition from earning money to needing income.  This plan should be reviewed and discussed prior to any sale to ensure there is appropriate liquidity from the start and there isn’t a lag period.

There are also some wealth transfer strategies that lose their effectiveness the more mature the company gets.  The key to most wealth transfer and estate planning strategies is to control when and at what valuation something is included in your estate or gifted to a trust or other individual.  This discussion is much more complicated than can be covered in this blog post and will be the topic of a future post. However here are two basic strategies that could be appropriate.  As with all estate planning and tax related strategies, please speak with your tax or estate planning attorney to decide what strategies are appropriate for you.

  • Gifting: This is the simplest form of wealth transfer. You can simply gift shares of your company to a child or other individual.  The IRS sets forth lifetime gifting rules and restrictions so being able to gift an asset when its valuation is low can allow any future growth of an asset to avoid being included in your estate.  This is not always the best strategy from a control standpoint but could allow you to shelter significant growth from your estate.
  • GRAT: A Grantor Retained Annuity Trust also allows you to remove appreciation from your estate in return for a stream of income over the life of the trust. An asset (in this case, company stock) is placed in the trust for a set period of time. During that time the trust must pay out an annuity stream back to the grantor during the life of the trust.  With interest rates still at such low levels, this income requirement is quite low allowing more money to stay in the trust.  When the life of the trust expires the remainder passes along to the beneficiary of the trust. The beauty is that any asset growth during the life of the trust is not included in the gift amount. The gift amount is determined by valuation when the trust is established. If you expect your company stock to appreciate rapidly prior to an exit this can be a very efficient vehicle to keep that growth out of your estate and pass it on to your beneficiaries. (This is a very high-level description of a GRAT. There are many other caveats and details that should be considered and taken into account).

Transition to income

Financially, this is the major shift that someone will go through.  Throughout the lifespan of the company, you were working all the time and probably drawing some sort of paycheck to cover your bills and live your life.  Once the company sells this income stream vanishes. This means you must recreate a monthly income stream while also making sure there is enough capital to provide this income stream for many years to come. Too often I find people focusing exclusively on the income side of things and not taking into account that your principle also needs to grow in order to last the rest of your life.  If you sell a company when you are 50 you may need your assets to last more than 40 years, and often times you want to make sure there is some sort of legacy left behind.  To put this in perspective, with historic inflation averaging just over 3%, the amount of income you will need to maintain the same lifestyle as today will double in just over 20 years.  You need to make sure your principle is keeping up with this, especially if you have any legacy ambitions.

  • Income: Income can be created using a number of different strategies. Most commonly we create a balance between fixed income instruments (often times utilizing municipal bonds for the tax advantages) and dividend paying stocks. The balance will be dependent on the interest rate environment and a few other factors.  We also have the option of selling off security positions that have appreciated.  While traditionally this hasn’t been the most advantageous option, with capital gains rates at such low levels it can be considered if managed properly.
  • Growth: With many people I talk to that are either selling a company or transitioning to retirement they only focus on the income side of things. They are under the mindset that they need to cut out as much risk as possible.  Yes, I think for any money that you may need to spend in the next few years you should reduce risk substantially but with a large portion of retirement or post exit dollars the time frame can be longer than you think and this money should be managed appropriately.  This growth side could look very similar to your pre-exit/ retirement portfolio as the time frame is also longer term.  A longer term portfolio has the ability to withstand larger fluctuations in order to achieve long-term growth.

This strategy may seem different than what most people hear while they are building their wealth. We are always told to have a growth mindset while we are accumulating our wealth and then we should cut our risk when we make the transition to the income stage of life.  What I hope is apparent is that is exactly what we are doing.  By adding in an income producing layer we are reducing the overall risk within your assets but are still providing some opportunity for growth.

Future ventures

All of this financial management sounds great, but is this how the real world works? With most entrepreneurs I speak with, they don’t look at an exit as the end.  They look at it as a stepping stone to the next venture.  This can sometimes be a dangerous mindset from a financial planning standpoint.

It’s not always as simple as selling a company and then using that money to create income for the rest of their life. Many entrepreneurs want to take this new found wealth and use it to create the next big thing.  As a financial planner, this can create some difficult conversations. It is my job to help clients reach their goals. However, it is also my job to communicate the risks and rewards of financial decisions.  These risks and rewards are not just limited to financial outcomes but stretch across all aspects of life; family, work, philanthropy, lifestyle, and legacy.  It is important to understand that by simply taking a windfall and investing in the next venture you are not just risking financial loss but you could be risking your family’s long-term financial security.

Entrepreneurs can sometimes be blinded by success, often feeling like if they hit it big with one company they can easily do it again. You got rich by taking risks, but taking risks is not how you maintain wealth. You maintain wealth by managing risk. As I mentioned earlier, the success rate of start-ups is quite low so more often than not the prudent course of action is to create a balance between maintaining long-term wealth and taking a risk on the next opportunity.  This balance is going to look different for everyone but this is a very important time to evaluate risk well beyond financial loss. The goal is not to prevent future risk-taking and potentially miss out on creating that next great company. The goal is to put yourself in a position where you can have both.

Emotional Transition

This can sometimes be the most difficult part of selling a company (or retiring).  Entrepreneurs can grow attached to their companies and to their work.  It gives them purpose and in some cases is almost like another family member.  When you sell the company you need to fill this void, both from a time and an emotional standpoint. As a financial advisor, this is not my area of expertise but I think it is important to mention because the impact of this emotional transition can affect your financial lives especially when it comes to decision making.

There is no one way to emotionally handle this transition. Some people do it by relaxing. Some people get active with philanthropy. While others simply jump back into the waters with another venture, consulting work or board member responsibilities.  Whatever path works for you, it is just important to be mindful of this void and its impact on the rest of your life.

So, congratulations. You sold your company. Just remember, the work isn’t over yet.

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Why do you neglect your finances?

In the years that I have worked as a financial adviser I have come across a very interesting trend that always perplexes me.  People routinely avoid their finances.  They understand that managing their finances is important but for some reason they often neglect them. This doesn’t just occur at certain levels of wealth but spans all income and asset brackets.  This avoidance not only has an impact on these individuals today but has a long term effect on their financial security, and potentially their children’s, for the rest of their lives.  Even more interesting to me is that almost everyone I talk to knows this.  They know they should think about their finances more and plan for the future.  They know they should take steps to reduce their taxes, save more or implement an estate plan but they still fail to take steps to do this. So, the big question is why?

The simple answer I hear most is procrastination, but procrastination isn’t a reason. Procrastination is the way you avoid your finances not the reason why. Why do you procrastinate then?

  • Fear: You know you should be doing something about your finances but you don’t want to honestly evaluate them because you are scared of what you will find.  You know you are behind. You know you should have been doing more. You think that by avoiding them then you don’t have to face and accept the problems that you have created and admit your missteps. Ignorance is bliss. These emotional responses to your finances and managing your investments are normal. The problem is that avoiding them doesn’t make them go away, it just makes them worse.
  • Time: You look at managing your finances as a time consuming burden. Thinking about them is daunting and seems like a huge project. However, there has never been a time when doing financial planning has been as streamlined as it currently is. Whether it’s hiring an adviser or using an intuitive online solution, the financial planning process has become simplified and there are solutions to fit any level of involvement desired.
  • Knowledge: Similar to above, you see managing your finances as a daunting task because you feel you lack the knowledge base to make smart financial decisions. Whatever your sophistication level, there is a solution available to overcome this barrier. Financial information has never been so readily available. No matter what level of advice or information you need there is an adviser or online resource that can help.
  • Don’t have enough money: This is an interesting one, but one that comes up often. You don’t feel you have enough money to warrant spending time thinking about it. I have come across this excuse with people that have no money and those that have millions of dollars. The interesting paradox is that you don’t want to focus on your finances because you don’t think you have enough money but the best way to have more money would be to focus on your finances.

Now, as a financial advisor, this would be the time when I should say that an adviser can help you solve all of these issues. While that may be true, overcoming these obstacles can and should start at the individual level.  Whether you decide to seek outside council or pursue your finances on your own you must first identify which of these roadblocks is holding you back and realize that avoidance is only making the issues worse.  The longer you neglect your finances, the harder it becomes to get back on track. Additionally, the emotional and financial burden that you must overcome only gets bigger as time passes.

The good news for anyone who has been neglecting their finances is that you are not alone.  You are in the majority. Start small if you have to. Speak to an adviser, open an account with a robo-adviser or just start getting your finances organized. You have to start somewhere, and even small tweaks in your savings and investment plan can have a drastic impact on your future.

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Manage Your Money Like the Patriots

Bill Belichick would have been an excellent financial adviser or investment manager.

Regardless of your feelings about the Patriots and coach Belichick it is impossible to argue with the sustained success they have been able to maintain since he took over as coach for the team in 2000.  No other football team, or team in any sport, for that matter, has seen the kind of consistency the Patriots have experienced for such a long period of time. Taking into account the salary cap rules that exist in the league today, what Coach Belichick has been able to do for the past 16 years is quite amazing. Over that time span they have won 13 division titles (next closest is the colts with 9), 6 conference championships (next closest is 3, done by 3 teams) and 4 Super Bowl titles (next closest is 2). So what does this tell us about investing and what lessons can we learn from Bill Belichick and the Patriots to make us all better investors?

The trait that overrides everything the Patriots do is discipline.  Whether they are signing new players or creating a weekly game plane, coach Belichick has a rare ability to remove emotion from the decision making process. He is not swayed by personal relationship with his players or other emotions associated with particular opponents. This same discipline should be the cornerstone of any investment strategy.

Coach Belichick is loyal to his players but he also understands that in order to maintain long term success he must be willing to make difficult decisions when it comes time to extend a player’s contract or trade a player. There are numerous examples of times that the Patriots didn’t re-sign a loved, star player, most recently when they let Vince Wilfork go to the Texans or traded Chandler Jones to Arizona. In the investment world it is very easy to let emotion get in the way of making a rational decision. Emotion should play some role in the planning process but when it comes time to make a final decisions, facts and rationality should be the driving force. You can love a stock/company and be loyal to a stock while you ride it up but there can come a time when even the best stock becomes over valued and it is time to trade that stock for another opportunity.

The Patriots also have a unique ability to not overpay for players or sign players when they are overpriced.  They will pay for value when they think it is there (which I will touch upon later) but they very rarely pay a premium price for a big name free agent without at least structuring the contract in way to minimize the salary cap implications. This has an obvious correlation to the investment world. We often hear investment pundits and the media fall in love with this stock or that.  There’s always the next big company or the next hot stock but the smart investor ignores this noise and only purchases a stock when its value exceeds its cost.  In this arena, it is quite clear that Belichick understands the thinking of investor Warren Buffet: “Price is what you pay, value is what you get.”

of the 2015 AFC Championship Game at Gillette Stadium on January 18, 2015 in Foxboro, Massachusetts.

Building off of this premise, the patriots understand that it is not one or two big name players that lead to a successful team but a portfolio of a number of different complimentary players that allow a team to be successful over the long run. They diversify their talent across all the facets of the game.  They may not have the best player at every position (besides quarterback) but the combination of a lot of really good players puts them in a position to win on an ongoing basis. Across the league there are teams that are able to put together a group of star players that allows them to be successful for a year or two but that model is rarely sustainable.  Belichick has found formula that allows him to put out a successful team every single year.  This type of diversification is the key to long term investment success.

Coach Belichick also has an innate ability to understand the risk-reward profile of a player, especially free agents. Time and time again he has been able to take a cast off from another team or a player that has fallen out of favor and maximize the value he receives from them.  He is able to identify talent and structure compensation packages that limit their financial risk while still providing for upside potential. Now he is not always successful with these project players but by limiting the financial risk he is able to create incredible value when they do work out. When creating a portfolio or deciding whether to invest in something, understanding the risk-reward profile of a specific asset is critical.  If the risk is too high, it is important of hedge some of that financial risk to limit downside exposure.

With all this said he is also not afraid to pay for true value when it presents itself. Rob Gronkowski is a recent example.  Rob Gronkowski is paid near the high end of his position and is still under contract for a few more years but the patriots have identified him as once in a lifetime talent so are already in talks to renegotiate his contract and pay him more in order to lock in his unique talents for years to come.  When analyzing a stock you never want to over pay for it but there are the stocks that see incredible growth yet still continue to exceed expectations so while the stock may seem expensive it is still worth paying that high price because of the proven value it is able to provide.

When it comes to actual game planning the Patriots always seem to create a plan that exploits the weaknesses of an opponent or takes advantages of opportunities that they are able to exploit.  They take the skills that each of their players have and simply ask them to “do your job” when called upon knowing that cumulatively if each individual player does their own job then the team becomes successful. When they identify that an opponent has a poor run defense, they put more emphasis on the run game.  When they are weaker defending the pass the patriots will throw more. An investment portfolio is made up of a number of different pieces as well. These pieces see different levels of success during different market conditions and are utilized for different reasons. The most successful investors have a rare ability to read what is going on in the market and create a game plan of how to best take advantage of it. In times when more income is needed they will shift assets to higher dividend stocks.  When there are opportunities internationally they will make their portfolio more global.  They identify opportunities and shift their strategy as needed to take advantage of these opportunities.

While managing a football team and designing investment portfolios would seem to require different skill sets.  The Patriots disciplined approach, ability to remove emotion and keen understanding of risk and reward has many correlations with being a successful investor.  The everyday investor can learn a lot about their own portfolio construction and how to make better financial decisions by simply applying some of these skills.


Investing, With a Side of Emotion

“Don’t let emotion drive your financial decisions.

We hear this line, or a version of it, from investment pundits all the time. During times of market volatility it is even more prevalent.  Is it realistic though? Is it possible to remove emotion from these types of decisions? And more importantly, should emotion play a role in our financial lives?

As humans, emotion drives the majority of the things we do and decisions we make in our lives.  We are inherently emotional beings. So if that is the case why do so many think it should be removed from the financial part of our life. The main argument is that emotion can often prevent us from thinking rationally about specific financial decisions. Greed and fear can creep into these decisions and prevent even the most educated investor from making the thoughtful choice.  I’m not saying I disagree with this argument and I find that many of the clients I work with struggle with these emotions when making financial decisions.  I will even go a step further and say a number of my clients hired me specifically to prevent them from making emotional investment decisions.  With that said, I do not think emotion should be removed from the financial planning and investment process. I actually think it should be embraced. The important thing to decide and understand is where emotion fits into the process and what role it should play.

So what is that role? Speaking with clients and prospects every day I find that emotion tends to be ever present throughout the planning and decision making process but too often it is present in the wrong part of the process.  Clients are scared that the market went down, so they want to sell.  They are excited that the market is going up, so the want to buy more.  This is a sign that emotion is getting involved in the wrong part of the process.

In initial client/prospect meetings, my goal is always to explore the emotions of the client.  I seek to understand why they are saving, what they are trying to accomplish and what is their goal for investing at all. When any individual is making the decision to start saving, to start investing, this is the time you should get emotional.  You should picture your future.  You should dream about where you want to be in 1, 10 or 30 years.  You should use emotion to understand the “why” behind your investing and financial planning. Without this emotional foundation, any planning or investing will lack true motivation and purpose.

When you understand why you are investing and where you want to be, the next step is to try to quantify this emotional reaction.  What do you need to do in order to reach those goals?  How much do you need to save?  What level of risk are you comfortable with?  What are the numbers behind what you want to accomplish? These are all questions where emotion will play a key role and the answers to these questions will create a framework to eventually make decisions.  Some people are able to do this step on their own, others hire an expert to help them understand this step, but the important part is making sure that you embrace emotion during these early stages of the financial planning and investing process.  Without fully understanding the why behind your investing it is very easy to get bogged down in the daily or weekly performance of your investments or plan. You start to question yourself and your process. You then allow emotion to creep into the next step of the investment process.  And this can be disastrous.

Once the goals, dreams and other emotional reactions are quantified the final step is making the actual financial decisions. At this point emotion needs to take a backseat. Stocks and bonds are not emotional.  They don’t perform emotionally. They don’t have dreams.  Their prices move and fluctuate based on investors’ perceived value of the underlying securities which is based on all available information about that security (or at least that is what the Efficient Market Hypothesis would lead us to believe).  So specific decisions about what, when and how to buy and sell need to be made without the influence of emotion.  At this point a well thought out, disciplined investment approach is king. Do this on your own, hire an advisor, whatever you need to do to keep emotion from creeping into this part of the process. As I said earlier, failure to do so can be disastrous. This can be illustrated by the lag in investment performance felt by the ordinary investor.  As Dalbar’s annual report on investor returns points out, as of the end of 2014 the average equity mutual fund investor saw an annualized return of 5.19% for the previous 20 year period while the S&P had an annualized return of 9.8% over that same time period.

It is naïve to think that investing and planning is this simple.  As I said at the beginning, we are emotional beings.  It is inevitable that emotion will find its way back in.  There will be that day when the market is up big and you think to yourself if you can just capture a bit more of the upside then you can buy that house sooner or retire more comfortably. Or that day that the market is getting crushed and you see that retirement date moving further and further into the future.  When this happens, all investors and advisors alike need to take a step back and remember where in the process these emotions belong.  This is the time to revisit the “why” behind investing. Go back to earlier in the process and see what your new emotions are telling you about why to invest or plan. Understand again what future you are saving for. If you are feeling stress or fear about losses or find yourself wanting more returns than you probably made a mistake quantifying the emotions around your risk tolerance at the start of the process. If any of this retrospection causes changes in your initial goals, then make the necessary changes and adjustments in those quantifications. Then proceed to the decision making process, with emotion again riding in the backseat.

The pundits should really say: “Don’t let emotion drive your financial decisions, but embrace it along the way.”