Accept Your Reality
June 3, 2021
Accept Your Reality: Many people believe that the primary reason for their success, failures, happiness, education, job, and “gifted” children (and their success) are mainly a result of the decisions they make and the control they exert over situations. This is of course partly true because it is essential to make the most of the opportunities presented to us.
However, I would argue that the bigger factor in determining your life’s path is attributable to chance. The country you live in, the laws that protect your rights and property, your physical abilities, your personality, and your intellectual aptitude. You cannot really take credit for any of these things, but without them, your life would be dramatically different.
So, I never fool myself into thinking that the primary reason for any of the joy and success in my life is the plan I laid out for myself. A plan is essential to make the most of the gifts we have been lucky enough to receive, but the control you exert and the plans you implement are not the reason for those gifts! I urge people to really reflect on that last comment.
I am concerned for people that spend most of their time focused on control and planning and not enough time on reflection and resiliency. It is hard to watch because I know that when unwanted and unplanned random events happen (they always happen; it is just a question of the degree of change), they are not prepared to deal with the disruption. Additionally, they have more self-induced stress generally in their day to day lives which leaves them anxious when confronted with decisions.
Pain comes from:
An unwillingness to accept a new reality. I know this as the source for my own pain. I just want things back the way they were! But there is no way back...the result: pain and frustration. This can be debilitating.
Blaming yourself even though you may just be the victim of randomness. People often believe had they done something differently, the outcome would be different. Often-times, it is just a random event that cannot be controlled. Accidental death, divorce, medical treatments, etc. I call this “shoulda-coulda-woulda”. Learning from your mistakes and forgiving oneself is important, but more importantly it helps to recognize that change just happens randomly.
Blaming others for an “unfair” outcome. Abuse, prejudice, disease, natural disasters. Using energy to blame your current ills on past events are also wasted energy. A close friend of mine always tells me, you have a choice: Transmit (to others) or Transform (accept and adapt).
Seeking justice or revenge in-order to “even the score” even when it will not change the outcome. Righting past wrongs to ensure justice often does little for victims. Justice is important if we want to change future behaviors, but the victim would be better off using their (limited) energy to forgive and adapt to their new reality.
I believe portfolio management allows someone to learn a great deal about themselves if it is approached as an exercise in self-improvement. It forces you to deal with change and violent disruption; it forces you to realize when you are wrong through losing money. The market does not care about your opinion or how you feel! Successfully navigating changing financial market conditions requires a robust and resilient approach to life first and portfolio management second.
Facing Reality in Your Personal Finances and Financial Markets: I come from a humble background, and I wanted to figure out how to improve my wealth over time. My reason for wanting to improve my wealth was to reduce worry and stress about money. I place very little importance on “money” itself, but I do value the freedoms that money provides to my family and me. Essentially, once I had money, I never wanted to lose that money; mainly because I never wanted to go backwards in my standard of living. However, there is an important distinction between maintaining a standard of living and not losing money. At August Wealth, we focus on balancing the following for our clients:
Goals for growth in wealth/net worth.
Goals for maintaining current standard of living.
Risk tolerance of client.
Market opportunities available to achieve client goals.
We spend a great deal of time getting to know our clients because we believe it is necessary to construct a portfolio that suits our client’s risk, with the hope of achieving their goals of growing their wealth.
One of our biggest strengths (we believe) in both life and markets is to differentiate between reality and one’s perception of reality.
Reality vs. Perception of Reality: Reaction of people during the past year to Covid was an excellent example of people’s perception of reality vs. reality; we have already discussed this extensively in other commentaries. People were emotional and full of fear a year ago, and they made predictions and plans based on their fear. Most of those predictions (demand for travel, work, economy, stock market) turned out to be completely wrong. Reality turned out to be dramatically different than people’s perception. There was plenty of evidence that would have helped people recognize this, but emotion took over and blinded them from seeing it.
The trick in markets is to recognize your emotion and your fear, recognize that the market does not care about how you “feel”, and make appropriate investments based on:
The reality of your personal financial situation.
The reality of currently available market opportunities.
Point (1): The reality of your personal financial situation: I had a general conversation with someone that told me some basic information about his family finances. He was in a very secure job where he would likely remain for the next 5 to 10 years. Makes approximately $1 million / year ($600k after tax), spends approximately $300k / year for all expenses and liabilities, and is sitting on an investment account with approximately $2 million. He had a home and vacation home with very little debt. He claimed he was very conservative, and most of the $2 million was invested in short term fixed income to protect his principal investment. He was adamant that he did not want to put his money at risk in the stock market as “it’s too risky”.
I have had many similar conversations with other families and clients where they explain they are very conservative, and I empathize with this conversation because I have had similar feelings (I still have those feelings in fact). When someone says they are “risk averse” that tells me about their fears and emotions. It does not tell me about the reality of their financial situation. I do not believe the correct approach is to construct a low-risk portfolio (as a client might suggest) because of a person’s feelings. I believe the following questions (to get to actual reality) must be asked:
A) Would you prefer to have $2 million or $4 million dollars? (answer, always $4m). B) How would your lifestyle change if you lost $500,000 in investment? (answer, not at all).
C) How would you feel if the purchasing power on your $2 million buys a lot less in 20 years? (answer, very disappointed).
Based on the above answers, this client should be investing for growth, not protection of principal, even if they are afraid of losing money.
We have now determined the client’s Reality instead of their Perception of Reality. Our job is to help our clients differentiate their emotion from their actual financial circumstances. Clients need to be comfortable with fluctuations in their portfolio in the shorter term to gain account growth in the long term.
Point (2): The reality of currently available market opportunities. Firstly, we cannot approach Point (2) until we have a complete understanding on Point (1). Once we understand the comfort level around portfolio fluctuations in the short term, we can then move to market opportunities.
The subject of market opportunities is vast, but I want to focus on some general conversations that I have had and statements I have heard many times.
A) I am sitting on cash, and I should have invested a year ago, but now the market is too expensive.
B) I put money into a company or a fund, and it is down 20%; I cannot sell it here. I will wait for it to recover in price.
Once again, both A and B have more to do with perception than reality.
(A): If you say, “the market is too expensive”, that implies that you know something about valuations, and that you expect the market to become cheaper. I have been a professional investor for 30 years, and my experience suggests you do not know that (and neither do most professionals). Even if you were correct, and the market declines by 20%, what is your plan? Most people do not have a plan. So, point A says more about your fear than it does about valuations.
We solve for this fear by having a plan to invest where we see opportunities over longer time periods, with appropriate risk as established in Point (1), and through diversification to solve for all that we do not know. We consider how much the market might decline before a decline, in-order to get comfortable with short term portfolio fluctuations.
So, despite the fear of buying the top of the market, we have solved for that anxiety by developing a plan, analyzing what adverse events might occur, and being comfortable if those events do occur.
(B): Saying you will wait for a losing investment to recover in price before selling implies that you should buy that investment today. I know many people that will not sell an investment because they are underwater on it. Again, this is an emotional attachment to something that has no care for how you “feel”. This is the fear of selling a losing investment and then watching the price rise. Well, it may continue to go down, or it may go up. However, the only question to ask is: Today, is this a good opportunity to buy this particular investment? If answer is “no”, you sell, if answer is “yes” you continue to hold the investment. What is clear is that your emotions should play no part in that decision.
We solve for this by having a plan from the start and removing emotion from the equation. We make investment decisions based on the opportunity as presented, and we believe our edge at August Wealth is recognizing when emotion is causing others to make mistakes.
What mistake do we believe is being made in today’s market?
There is too much money chasing too few assets, and investors are sitting on too much cash. I know I sound like a broken record, but the cash piles continue to build. This is the reality, and it is not comparable to any other situation we have seen in modern history. See the FT article below which highlights a chart entitled: Wall of cash overwhelms money market funds.
We continue to believe based on this reality of money creation that prices will likely push higher for real and financial assets. We believe we should protect ourselves and our clients against this money creation by owning assets that will hopefully protect and grow our wealth.
We may be wrong in our assessment, and if you believe we are, I strongly urge you to send me your comments. But before you do, I suggest asking yourself if your feelings and emotion are creeping into your assessment.
Joe Cardello Joseph Cardello, Principal August Wealth Advisors, LLC The Loft, 101 Franklin Street, Suite A
Westport, CT 06880 Direct (916) 461-9451 toll free (800) 985-9477
Investment advice offered through Stratos Wealth Advisors, LLC, a Registered Investment Advisor DBA August Wealth Advisors. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.