Teaching the Teacher

I RECENTLY STARTED reading Think Again, the new book by Adam Grant. Subtitled The Power of Knowing What You Don’t Know, Grant’s book got me thinking about all the ways that, over the years, conversations with clients have led me to look at things through different lenses. Below are eight such topics:

1. There’s one important financial question that stumps most everyone—for good reason. In building a financial plan, a critical input is a family’s spending rate. In financial planning classes, this is one of the first questions we’re taught to ask. But this turns out to be an exceedingly difficult question for most people to answer. Some people use software to track their spending. But more often than not, many families have largely thrown in the towel on this question. Over time, I’ve come to understand why.

It’s not that people don’t want to know this information. I think it’s because the systems that exist—whether it’s Quicken or one of the newer tools, such as Mint, Tiller and YNAB—still require a lot of manual maintenance. Even though these tools can connect to banks and download data automatically, that data still requires line-by-line review to ensure it’s all categorized correctly. That task has only gotten harder in recent years with the rise of payment apps like Venmo and Zelle.

My hope is that there are entrepreneurs in a garage somewhere working to solve this problem. In the meantime, what’s the solution? If you haven’t tried one of these newer tools, I recommend testing a few to see if one suits you. In the spirit of my comments last week—that good is better than perfect—use them as much as possible, but don’t worry if the numbers aren’t perfect. There’s value in having even a ballpark sense of your spending.

2. Investments are in the eye of the beholder. I recall once having a conversation with two colleagues. The first explained that 100% of his assets were in real estate. He felt that rental properties were easy to understand and he liked knowing that rent checks would reliably roll in each month.

The second responded that he didn’t own real estate at all. He cited the risks: What about a middle-of-the-night plumbing problem or a tenant who’s late paying rent? For those reasons, this second fellow invested all his assets in the stock market. He liked being part owner of great companies, from Apple to Amazon and many more.

In this discussion, I realized that neither was necessarily right or wrong. I always advocate diversification. But as long as an investment generally makes sense—and both stocks and real estate do—then I think it’s equally important to be comfortable with what you own.

Writing in Unconventional Success, the late David Swensen articulated this point well: “Personal preferences play a critical subjective role in portfolio decision making. Unless an investor embraces wholeheartedly a particular portfolio structure, failure awaits.” Why? Swensen explained, “Lightly held positions invite casual reversal.” In other words, if we own an investment but aren’t fully comfortable with it, we run the risk of abandoning it at an inopportune time, thus locking in a loss.

I think this is an underappreciated point—that it’s okay for personal preferences to play a meaningful role in how you invest. There are many valid ways to invest. You shouldn’t feel any need to own an asset or asset class if you aren’t fully comfortable with it.

3. Values-based investing is more important to people than the data would suggest. Look through the list of S&P 500 companies and, depending on your values, there’s bound to be more than one that doesn’t sit well with you. Look at investment industry data, though, and assets managed on the basis of ESG factors—environmental, social and governance—still represent a tiny fraction of the market. The disconnect, I think, stems from the fact that off-the-shelf ESG funds can’t be customized. They’re intended to be one-size-fits-all. That makes it hard to find a fund that’s a perfect fit for any given individual’s goals and values.

At the same time, it would require a monumental amount of research to build a portfolio from scratch. That’s why I’m excited about the trend toward direct indexing, which will give investors the ability to tailor portfolios as they see fit, ejecting stocks they don’t like and doubling up on the ones they do. These services are still maturing, but I think this is a trend worth watching. Personally, I look forward to the day when I can eject Philip Morris.

4. People worry about the market—but that’s not what they worry about most. Listen to the financial news, and there’s a lot of focus on the stock market. To be sure, the market is important. But that’s just one of the financial concerns that keep real people awake at night.

People worry about whether they’ve saved enough. They worry about debt. They worry about the crushing cost of college. They worry about the dysfunction in Washington. Maybe most of all, they worry about their health and ability to keep working. Is the stock market important? Sure. But it doesn’t deserve nearly the level of attention it receives.

5. Real estate can be a huge wealth builder—but one formula seems to work better than others. If you want to invest in real estate, you have a lot of options: You could buy a real estate investment trust fund, invest in a private fund, or go the route of a syndicate or crowdfunding. But the approach that seems to generate the best returns, especially after taxes, is to own an individual property. As noted, it isn’t for everyone. It’s definitely more work. But in exchange for that, there are fewer intermediaries subtracting fees, leaving more for you, the investor.

6. In retirement, income seems to matter more than assets. Most people perceive annuities as overpriced and unnecessary. In many cases—maybe most—that’s a fair assessment. But something I’ve observed is that folks with more guaranteed income, such as a traditional pension, seem happier and more at ease, both before and in retirement. There’s also data showing that people with annuity-like income live longer. Does that mean you should run out and buy an annuity? No, but I do think they’re worth an unbiased look.

7. Downsizing is tricky. For many people, downsizing seems like an appealing strategy to bolster financial security after the tuition bills are paid and the kids are launched, and when retirement is on the horizon. In practice, though, I’ve observed that it’s harder than it looks. First, there are broker’s fees and moving expenses. Then there are capital gains taxes, which can be significant if you’ve been in your home a long time.

Finally, there’s the cost of buying a new place. That can be expensive if you want to stay in the vicinity of your old house. For all these reasons, it often seems like the net proceeds from downsizing are less than expected. No question, it can produce magical results in some cases. I’ve seen that. But it’s worth running the numbers if you’re considering this as part of your plan.

8. Everyone thinks about estate planning differently. Walk into an estate planner’s office, and the lawyer will show you a dozen ways to cut your estate tax bill, so your children receive a larger share. That’s the standard approach to estate planning and, in general, it’s worth whatever legal fees it costs to sidestep the federal estate tax, which stands at a hefty 40%.

But it’s also worth stepping back and asking whether this standard approach is what you want for your family. Why? Estate planning necessarily adds complexity—with new trusts, trustees and tax returns. But more important, wealth can be a burden. That might sound like a “first world problem,” but it can be a real concern. While we all want to help our children, some families feel it can be unhelpful to leave too large a sum.

Am I suggesting you disinherit your heirs? Of course not. But especially with the stock market’s gains in recent years, it might be worth revisiting your plans. Keep in mind that it doesn’t have to be an all-or-nothing decision. I’ve seen lots of creative approaches on this.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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