FINANCIAL LIFE PLANNING

Ross Levin

Market fluctuations aren ’ t a punishment for being an investor . They ’ re the admission price .

HE TWO GREATEST WEALTH MANAGEMENT BOOKS EVER written have sold a combined 1.8 million copies . One of them , Morgan Housel ’ s The Psychology of Money , accounts for 99.997 % of those sales . My book , The Wealth Management Index , represents the remaining . 003 %.

A casual observer ( me ) might say that my book doesn ’ t deserve to be mentioned in the same sentence . So let ’ s talk about Morgan ’ s book instead . It speaks to a general audience , and we should be paying close attention to its wisdom as it helps us in our work with clients — and as it helps us curb our own appetites .

As markets move all over the place and as our income drops with our clients ’ investment accounts , it is useful to remember that , according to Housel , “ Volatility is a fee , not a fine .” Fees are the price we pay for getting something valuable . Heck , it is what clients pay us for — our hopefully sage counsel . A fine is a form of punishment .

Market fluctuations aren ’ t a punishment for being an investor , they ’ re the admission price . I remember being on a local talk show when I was in my 20s with the author of the book Wealth Without Risk . He was polished and glib . I was neither . I told him that everything he said was 80 % right , but that it was the other 20 % that made the biggest difference . After the show ended , people crowded around him . Even I almost asked for his autograph ! He ended up being sued , and a California jury ruled he defrauded 29,000 people in the state .

We know that you can ’ t have wealth without risk or market returns

It is useful to remember that , according to Housel , “ Volatility is a fee , not a fine .” Fees are the price we pay for getting something valuable . without market volatility . We also know that today ’ s market heroes can be tomorrow ’ s losers . I realize that none of us promise stock market returns when things are going up or promise money market returns when things are falling ( except maybe those who misunderstand indexed annuities ), but it can still be challenging when clients are scared and may feel like we didn ’ t do enough to protect them .

Most clients want to know only that they are going to be OK . The only possible thing they can do with their money is spend it or give it away . We have to help them get comfortable with the volatility fee they pay , and that means knowing what their objectives are .

At our firm , we have always set aside one to three years of spending in a cash bucket that will be used during these times . If we perceive markets to be expensive , we will have higher levels of cash . When markets are like they are today , we will let the cash dwindle . This strategy may not be optimal , but optimization occurs when people are able to stay with a long-term plan . Every client is a single case , so asset allocation and cash strategies need to be tailored to individuals . Having the cash bucket goes a long way toward helping clients realize they will in fact be OK .

Yet markets like this do wreak havoc among older clients wishing to leave a legacy to charity . If they leave less to

20 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2022 WWW . FA-MAG . COM