Strategy
One Best Thing Syndrome
By William Kaufman
Branch Manager, Raymond James Financial Services, Inc.
Could it be that some of the traits that help
people become wildly successful are the same
ones that cause difficulty later on?. Everyone knows of a successful business person who focused their
efforts and talents relentlessly in one direction
and rarely looked back for fear of losing their lead.
If they failed, they picked themselves up,
evaluated how and why they went astray, and tried
again.
These people have learned to first concentrate
relatively few available resources on a project
and than leverage them like a breeder reactor.
"Concentrate" is a key word here. Discovering
and fully using freely available resources in a
way that large competitors have not, doing one
or two things really well, adding one innovation
to a widely used system, perfecting a single
strategy faster and better than anyone else, all
are examples of their ability to focus resources
and do the "one best thing" with what little they
have.
Ask them how they became successful, and
they will usually be able to answer in several
short sentences. They "happened" on the right
formula, approach, strategy, and product; that
is, they happened to do the "one best thing" with
what little they started with.
Odd as it may seem, the writer has noticed that
when it comes to family financial planning, these
otherwise successful people frequently find
themselves at an impasse.
The paradox is that the best financial planning
often requires the obverse approach of what
helped these same individuals achieve success.
Rather than a single strategy or approach, the
best financial plans are usually multifaceted
constructs aimed at avoiding risk, maximizing
return, minimizing taxes and securing loved
ones. Each component of such a plan
complements the others and creates
redundancies insuring against failure. They are
not "one best thing" affairs.
What one hands down as a result of one's daily
toil is going to be measured by how well one
does many good things with money during one's mature
retirement years. There is a transition here: making money
doing the one (or two) best things in business,
keeping it doing the numerous right things as
an investor and family leader. The transition from
executive, business owner, entrepreneur, to
investor and family finanancial planner, involves
some serious brain rewiring.
Absent the rewiring, the most common behavior
has always been to do that "one thing" with
one's nest egg, that is, to have one sort of investment that one considers really safe. A very common approach, for example, is to invest in risk free short term treasury bills or triple-A short term municipal bonds. This is a comfortable way to deal with perceived risk, and, of course, it mirrors the "one best thing syndrome". But any "one thing" strategy introduces unnoticed risks into a portfolio like, for example, inflation risk. What if our national currency loses value in the world market and/or we have a sudden and ongoing bout of inflation?
Another common solution is to do something "familiar" with one's money, or just leaving it alone in it's already familiar place. That is, if in the hustle and bustle of running one's business one just had enough time to stash money in a safe place like a CD at the local bank, why not just leave it there and even buy more CD's. This "one
thing" strategy introduces an enormous risk to
self and loved ones, called "opportunity cost
risk." As an example of opportunity cost,
compound out the loss of 300 basis points (3%)
(the approximate difference between a "risk-free
yield" today of 5%, with 8%, a reasonable
expectation of long term return in a diversified
portfolio) on a $1,000,000 investment over 40
years.
[The difference is $7,086,000 vs $21,663,000!
The "one thing" safe investment created a loss
to self and family of $14,577,000!]
Whatever "one-thing" investment strategy one
adapts, with no exceptions, it is sure to have a fatal embedded flaw. Any investment strategy involving
finding the one best asset/investment for one's entire portfolio, will lead to a portfolio that cannot
survive every scenario that can emerge in our
ever more rapidly changing eco-political
universe. Again even the "safest" investments
guarantee the lowest return and therefore the
highest exposure to at least two sorts of risk;
the loss of future purchasing power and the
"payment" of enormous opportunity costs.
But of all the symptoms of "one-best-thing
syndrome", there is one that renders even the
smartest people paralyzed with doubt. Looking
for the "one-best-thing" (which as a fiction can't
exist) makes one think a really long time to
decide on a course of action. Since look as one
might, it can't be found, the final impulse is to give up in frustration and do nothing.
Not only is inaction the result, but the
decision making process for really important
family matters becomes fraught with anxiety.
This observer believes that this is one of the
primary causes for procrastination in doing
what ever is truly in one's over all best interest.
For an investing solution to counteract one's
own tendency to fall into this trap, It may be
helpful to think in terms of portfolio construction
rather than thinking about acquiring investment
assets piecemeal. One might think of
investment asset groups such that it isn't possible
in one's imagination to envision a scenario
where all group members "crash" (go down substantially) simultaneously while one or
or one's family, physically survives the scenario.
Using this powerful concept (which I call
scenario diversification) makes portfolio construction engaging.
While one can't protect one's entire portfolio
from every conceivable scenario, obviously, not all
scenarios can emerge at once. Many are actually mutually exclusive. While one can always imagine a scenario that will "wipe out" some investments, the key principal here is not to be able to imagine a single scenario that will wipe out all, or most, or a substantial part, of one's
portfolio. If you can indeed imagine such a scenario, than you should consider making changes in your portfolio immediately.
Scenario diversification is easy to adapt- we were all blessed at birth with sufficient imagination to adapt this powerful diversification strategy.
Of course, if one can imagine a scenario in
which the world truly ends, it doesn't count in
this exercise because losing all our money
wouldn't matter.
Modern portfolio theory is another good starting
point. In simple terms, the major theme, asset
allocation, involves finding investments that are
inversely correlated, that is assets that don't all
go down (or up) at the same time, and that each
have historical growth rates which beat (or at least have kept up with) inflation and taxes. Notice that these two concepts(asset allocation and scenario diversification)
totally avoid the "one best thing" trap.
Its helpful to think in terms of multiple financial
planning strategies and redundancy. When one
investigates an investment for example, one
might subject it to an over-riding primary single
question: How does this investment complement
my portfolio?
The "one best thing" approach instead often subjects a prospective investment to a single criteria test like, for example, asking the question: "Is this the best investment if I don't want to lose any money?"
The problem is : If one constructed most of one's portfolio with this single criteria and then used this same criteria to decide on future investments, at the end of the day one would have an undiversified (read: vulnerable) and low
yielding portfolio indeed. Little chance here of beating inflation and taxes, of making a big inter-generational impact, of having an ample retirement cushion. In other words, an overemphasis on one asset class (because of one desireable characteristic-such as extreme safety), exposes the holder to a risk he didn't contemplate or fear, like inflation.
While one does his due diligence, he should
keep in mind that the primary question is not
about if he is "comfortable" with an investment
because one will tend to be only comfortable
with the familiar assets that one already has too much
of, and his risk grows that these similar
investments might all respond in a like manner
to any one adverse scenario. Remember, whether you fear a risk or not does not diminish the potential for that risk to affect you. A risk is a risk, and risks are matters that are very real in the world of statistics and probabilities.
The cure may be simple. One needs to be thinking about investment diversification. Investment assets that complement each other. In estate planning, one might think about doing the right things instead of the one best thing. Surely the skills that one acquired as the business owner, entrepreneur, high paid executive, will really help
one do his financial planning, but it is really
essential to be fully aware of old emotional and
ideational baggage that may overshadow rational
thought.
Because estate planning differs from investing in
that it seems remote and esoteric, a useful
approach is to think of it as a multifaceted task
in which desired outcomes are being created.
The goal is essentially the same as in investing.
And as such, the thinking process is parallel.
Good investing keeps and grows money as good
estate planning does the same, but results are
measured intergenerationally. On envisioning an
estate outcome one truly desires it is important
to realize that the results one seeks might need
to be created with sophisticated (and even arcane) legal technology.
Surely there is no one perfect estate plan for
everyone alike, nor can there be one thing we do
that defines and insures all our investment
goals. Increasing security for loved ones,
increasing inheritable assets, reducing taxes,
and avoiding inheritor conflicts and troubles is,
however, a goal that may inspire one to accept
some initial complexity in one's planning. It's a
goal that can't be reached by procrastination
and maintaining the status quo.
We need to keep doing the right things instead
of looking for the one-best single thing that
dispenses with the whole problem.
It doesn't exist
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