Financial Endurance
As an endurance athlete and wealth manager, among the most appropriate analogies I use with clients, links my experiences having run some 30 marathons and almost as many years involved in the asset management industry. As you might imagine, the many hours of training provides a lot of time to think and reflect… perhaps a bit too much time.
If we look at our financial lives as a long distance journey, most people want to have enough money to meet all their planned and unplanned needs along the way with some extra cash for fun, leisure and luxury. Of course, we can’t lose sight of the ultimate finish line and don’t want to outlive our assets or fail to leave money to family, friends and charities, as planned. Just as marathon runners must prepare and pace themselves to cross the finish line at 26.2 miles despite hills, winds and unforeseen weather conditions, as investors we are challenged to do what it takes to safely complete our journey. Have we carb loaded and taken in enough fluids before the race? If we start out too fast will we have enough endurance to finish? If we find ourselves faced with steep hills and strong headwinds at times, will we have the confidence and fortitude to endure them? When we come to a downhill with a comfortable tailwind, will we use that extra boost wisely to help survive the next challenge? Will we “hit the wall” at mile 20 or will we have prepared and paced ourselves efficiently to pull us through the finish line? Well, you get the picture.
After many years of study and practice in the asset management industry, I have found that individuals approach their financial journeys using one or a combination of strategies I call “The Sprinter”, “The Marathoner” and “The Wanderer”.
The Sprinter can be characterized as the individual who is looking for the next hot stock tip or tries to outsmart the market with brilliant stock picks and precision market timing skills. The mindset is to “play the market” similar to the way a gambler plays the tables at a casino. Never counting their cards while they’re sittin’ at the table. And, have you ever heard of a Black Jack player not doubling down while holding 11 against the dealer’s 6 as a strategy to reduce their income tax liability? Sprinters love boasting about their winners at cocktail parties and on social media, but rarely mention their losers. They may become disillusioned, losing momentum after sustaining a significant loss and often do not have the required discipline and endurance to complete their long-distance financial journey.
The Marathoner is one who paces themselves for the entirety of their financial journey. They tend to possess greater discipline and patience than the Sprinter and can see the forest for the trees. As in my running analogy, The Marathoner is more comfortable with planning and committing to an investment approach without being overly distracted by short-term shifts in political, economic or market conditions, while keeping their eye on the ultimate goal. This is the strategy on which I focus most in my practice.
The Wanderer is the individual who generally has no real strategy and manages their financial affairs as one big slush fund. They deposit their income, write checks, and save or invest if anything is left over. When they do invest, they do so without any deliberate approach or discipline. Their investment portfolios resemble a random patchwork quilt accumulated over time and is rarely revisited. Wanderers tend to be younger or may simply not have the time, willingness or ability to manage their financial affairs effectively. However, with some solid coaching and training, they do have the potential to complete their journey.
While the Marathoner approach may be the best and most rational approach for many individual investors and their families, it isn’t necessarily the most exciting and does require some discipline and effort. To keep clients motivated and sticking with the program, they often need some excitement or flexibility to sew their Sprinter oats. By allocating a measured portion of their wealth to invest or speculate as they choose, we create an important pressure release valve to keep them in the race for the long run without boring them to tears. Likewise, it’s important to provide some slack for the Wanderer who prefers not to account for or allocate every dollar for specific goals.
I often recommend that clients combine approaches, balancing their long-term financial goals with their shorter-term desire for a bit more excitement and risk taking, or, for some, a tendency to think as little as possible about their finances. I typically begin by defining the portion of their portfolio to be managed as a Marathoner based on the client’s needs for income at specific mile markers as well as long-term growth. The objective here is to ensure that they are on target to meet all their financial needs through appropriate investment planning, asset allocation and security selection, while minimizing the risk of not crossing the finish line. Once we have calculated an appropriate marathon pace to carry the client steadily through their journey, we can then determine how much is left over for the Sprinter strategy to feed their emotional need for greater risk taking and to be a hit at the next cocktail party or receive the most “Likes” on social media. Only after the Marathoner’s financial needs and the Sprinter’s emotional needs are met, should a portion of assets be allocated to the “happy go lucky” Wanderer approach as their slush fund to spend or save as they choose without preventing them from reaching the finish line. As in running a marathon, investors must periodically reevaluate where they are relative to the finish line and rebalance their strategy to ensure success.
In the coming weeks, in this column, I will provide some practical investment solutions for how best to implement the Marathoner, Sprinter and Wanderer strategies. Among the topics I will cover include:
Keep training, do not forget to drink plenty of fluids, and sleep comfortably.