BIG GAINS
Recently, I have been having four types of conversations around “Big gains.”
Here’s the good, the bad, and the ugly of recent gains.
SCENARIO 1: “We’ve experienced big gains, should we pay off the mortgage?”
Later in the dialogue it comes out: “We’re not exactly broke, but we can be tight month-to-month.”
Two stocks with parabolic returns have moved the needle for this young family. These two securities make up over 50% of their liquid net worth.
We reviewed three primary options:
- Sell the securities, payoff the house and reinvest the former mortgage payment into a diversified portfolio
- Maintain, grind out the mortgage. Continue the current path with minimal free cash flow but ride the securities into the future.
SCENARIO 2: “We’ve experienced big gains, but are we missing anything? Is there anything that might cause our current plan not to work?”
This family is in their mid-40’s and about $600,000 ahead of plan. Several investments were larger than our target allocation and need to be reduced in size.
This couple had also not addressed the risk of long-term care in their plan (we believe the prime opportunity to secure a long-term care solution is for healthy individuals between 45 and 55).
To answer their question, “Are we missing anything?” Yes, they were and we made some simple adjustments: We righted their portfolio allocations and added a long-term care solution.
SCENARIO 3: “Why don’t I see bigger gains in my portfolio?”
We are meeting with families that want us to review their portfolio. They want to know why they aren’t experiencing the growth that they hear from friends, family, and co-workers?
I believe it is important for our clients to have a general understanding of what we own, why we own it, and where it fits their overall plan.
What I am seeing in real life is many underlying investment positions and investments with internal expenses that are above average.
Diversification is great. Overdiversification is not. We think it is important to avoid overlapping as much as possible (for example: we don’t want to own XYZ stock in 6 different mutual funds).
Largely, this comes from investments being run by an overarching firm model. The firm determines the underlying investments.
At Know My Plan, we believe in removing bias and incentive. We think believe it’s imperative that we control 100% of investment allocations and that we have autonomy to build our own portfolios, thus yours. No single person, or firm mandate dictates our investment decisions.
Sometimes the reason why your portfolio isn’t experiencing bigger gains is because you have underperforming, highly correlated, or expensive investments.
Sometimes, it can even be as simple as your investments don’t represent the benchmark you hear about on the news. If you’re in a balanced portfolio with a 60% stock allocation, you shouldn’t expect to track the S&P 500® index. Expectations are everything.
SCENARIO 4: “We missed it. Now, I need to catch up.”
This is a hard conversation. Not everyone was in a position where they participated in the growth of owning a diversified portfolio over the past 15 years.
In this situation, of feeling left behind, many have the natural inclination to chase returns. Take on more risk (meme stocks, microcap stocks, minimally covered cryptocurrencies, and advanced option strategies).
My message is steadfast. There is a reason that the rearview mirror is the smallest. We must simply move forward. Slow and steady wins the race. Playing catch-up and chasing returns is a quick way to compound a problem.
Together, let’s create an enduring plan for the next three+ decades. We’re here for you when you’re ready.
–Nic
Please note with all our blogs, personal identifiable information has been changed. Names and locations have been changed to protect identities. Stories have been slightly modified to maintain anonymity.
