Investment & Risk Analysis – August 2020
This month’s theme of “Investment & Risk Analysis” is quite timely. It’s the biggest topic we talk about this year and with good reason. Are we encountering something “different” this time? Should we just wait it out until things aren’t “changing” so much? These are sentences we’ve heard a lot over “our” (read: “Jeff’s”) 52 years in the industry. I don’t think these questions are ever going away, because we all want to make sure we aren’t missing a scoring chance. Or worse, making a mistake that we won’t recover from.
Enjoy this month’s OC Wealth Coach reading!
“What should I do with my investments?” It’s a simple question with a complicated answer, because “it depends.” Why does it always “depend?” Does it “depend” on something logical or emotional? What if this time is different? What about when things change?
It reminds me of my youth soccer coaching career, which has some similarities to wealth coaching. What does a kid do when they receive a soccer ball at their feet in a game? A professional would say “it depends.” It depends on where you are on the field, and where the other team is, and where your teammates are. There are 22 players out there, so things will always be different and always be changing.
But if you know the Hustons, we wanted to make it a logical framework to use for these aspiring 9 year olds.
We developed a list of questions to (mentally) ask when you receive the soccer ball. And we refresh this list constantly as the situation changes. It’s intentionally simplistic, so bear with me fellow “football” fans.
If the answer to a question is a risk appropriate “yes”, then you do it, and quickly. If it’s too risky or “no”, then you go to the next question. It goes like this:
- Can I score?
- Can I dribble forward ?
- Can I pass to someone else who can score?
- Can I pass to someone who is open 1) forward or then 2) sideways or then 3) backwards?
- Can I shield/dribble backwards?
- If you’ve gotten this far, your team is probably just standing there while you talk to yourself. Either kick the ball upfield with purpose, upfield out of bounds, or just out of bounds. Buy your team some time and try to win the ball back.
The whole point of those questions is to think very objectively during a time that you may feel panicked. Sound familiar? The more practice you have going through these questions and making decisions, the faster and better you get at making those decisions, the better the outcomes become, and the more fun you have. It’s actually calming. Calm as one can be when it feels like a dinosaur is chasing you. It helps you ignore the “KICK IT” screams from the sideline. Of course, you are going to kick it…it’s soccer. But kick it where? And with what purpose?
The farther down those questions we get, the odds of “certainty” need to be higher. If a good scoring chance misses the mark, we regroup and prepare for a goal kick and then the other team needs to go through all 11 of us to score. But if a backwards pass gets intercepted, there may not be many players left to stop them. The odds of scoring in #1 may only be a meager 10-20%, but it’s worth taking those odds to score. But by #5, if we don’t have near 100% certainty of maintaining the ball by shielding, it’s time to get rid of the ball. The odds are higher in winning the ball back upfield than chasing an opponent toward your own goal after you lose it.
This is similar to investment questions we often use as a framework. The higher we answer “yes” on the questions, the more risk/uncertainty may be acceptable. In investment goals, there is also a distinction between “lump sum” goals (such as buying a house) and “continuing” goals (such as retirement). Again, this is overly simplistic, but bear with me. 🙂
- Is this money for a goal that starts/is a very long way (20+ years) away?
- Is this money for a goal that starts/is a long way (10+ years) away?
- Is this money for a goal that starts/is a medium length (3-10 years) away?
- Is this money for a goal that starts/is a short length (< 3 years)* away?
So what am I getting at? Well, money for a 40 year old’s retirement may be a “yes” to #1. It may make sense to take more risk there compared with even that same 40 year old who is also saving for a house down payment in a year or 2. Those accounts should have different risk treatments. Quite frankly, it may not even make sense to take ANY risk with a “yes” to #4 that is a lump sum need.
Just like in soccer, the farther we get down our list, the more certainty is required. If I were to take 10 shots on goal in soccer during a game with only 20% success, I “should” score 2 goals, which isn’t terrible. But if I am only 80% successful with my 10 backwards passes to my goal keeper, that may mean I gave up 2 (perhaps avoidable) goals.
We have the ability to be more “short term wrong” in our 20+ year investments than the < 3 year investments. Because I’m hoping to have many more “shots” at my retirement goal, but not as many for my house downpayment.
The main difference in soccer compared to investments is that there is no “inflation” in soccer. If we decide after scoring a goal to just “turtle” and not let the other team score, we hopefully will still win 1-0. But if there’s inflation with investments, it’s like the opposing team’s score ticks up a goal every quarter in addition to whatever “goals” we also give up to them. And it’s up to us to try to make sure we are taking enough shots to keep up. It may make sense to play more defensively and preserve the lead near the end of the game, but we just never know how much “stoppage” time is going to be added by those blind zebras. (Sorry, just had to take a jab at the youth soccer refs for good measure.)
Just like how a 9 year old may panic when the ball is at their feet, we may have a similar emotional reaction with our investments. In the moment, we may panic, but it’s rarely good to make a quick emotional decision. Instead, we need to answer the logical questions to help guide us to a long term, stable, statistical decision. And the more we go through those questions, the easier that decision-making becomes.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.
See you on the pitch,
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Trent Huston is a Financial Consultant with securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through AK Financial Group, a registered investment advisor. AK Financial Group and OC Wealth Coach are separate entities from LPL Financial.