Your Own Royal Wedding
Prince Harry and Meghan Markle got married last weekend, apparently it was a big deal. According to the Telegraph an estimated 1.9 billion people watched worldwide. We admit we were not part of that number. We get up early to watch the British Open, not a British wedding. While the cost of the wedding remains privy only to the Royals, we are pretty sure it cost a lot. Costs however are relative, so while their wedding cost is undoubtedly more than any of us will spend, the financial impact is irrelevant to them. We unfortunately can’t say the same for ourselves.
Big life events like college, weddings, and retirement create a need for a financial plan. Quite a few of our clients have weddings coming up in the next year. Fortunately, there was a financial plan in place to pay for this wonderful day. The formula is simple yet very hard to execute. Save, invest, and manage volatility. Here’s the catch, the earlier you start the planning process the easier it is to achieve your goals. We know you hear this all the time, “you need to start planning early for retirement”. We also hear we need to eat more fruits and vegetables and less fats. We don’t always do a great job of following sound advice though. That’s why we have an annual physical. For most of us the doctor looks at our numbers and suggests we drop a couple pounds, exercise a little more, and eat foods lower in fat. We leave the doctor’s office inspired to do better, but within a few days we start to drift back to our former ways.
Consider us to be where you go for your annual financial physical. We identify what you need to do to be financially healthier. It’s not about being perfect, it’s about improving. So just like your doctor repeats the same advice each year, we will repeat our financial advice;
Cash is a killer - It’s the financial equivalent of cigarettes. It’s satisfying in the immediate, calming your nerves to the volatile world around you. Long term it’s killing you. Over the last 90 years, Treasury Bills (the cash rate) has barely kept up with the rate of inflation. It doesn’t improve your real purchasing power. You can’t possibly achieve your financial goals by holding cash. The only money that should be invested in cash is money that you will need to spend within 1 year. Otherwise, cash is very unhealthy.
Volatility Matters: Volatility harms an investor in two ways: emotionally and mathematically. The emotional impact is straightforward and easily understandable. Fear often leads to investors withdrawing money from the stock market even though market fundamentals are appealing. This often leads to not participating in the longer-term appreciation of the market. The mathematical impact is far harder to recognize and understand. An investor’s ending wealth is based upon two components, return and volatility.
Compounding of investment returns is based upon the geometric mean, not the arithmetic mean. A general principle of the geometric mean is that all things being equal, volatility reduces ending wealth. Here’s a simple example of two investors to illustrate. Each investor averages a 10% return each year for 10 years. Investor A gets exactly 10% each year while investor B averages 10% by going up 30% and then down 10% the next year. Here’s the impact on a $100,000 investment.
Even though both investors averaged 10%, Investor A ended up with $40,000 more than Investor B. This is the mathematical reason behind why we focus so much time minimizing the volatility of your portfolios. Volatility creates inefficient compounding and erodes your wealth. Creating the optimal asset mix to lower your cholesterol, sorry, to lower your volatility, is important for long-term financial growth.
So until your next financial physical we will give you this advice. You’re doing great but you should exercise (save) more and eat (spend) less to improve your financial health. Invest wisely and with an explicit plan. Don’t just wing it. Have a plan in place. While we would all like to be perfect, that’s not going to happen. So instead, lets focus on improving and we will see you at your next appointment.
To a healthier you,
The GreenPort Team