It is easier to make money decisions when you depersonalize them. Think of your investments as a business with very clear profit and loss metrics. Practice the dispassionate discipline of looking at all stakeholders and considering all goals, timelines and risks. Now that it’s late October and just a few months before the close of the calendar year, let’s take a look at the many investment considerations that go into each buy and sell decision for your family/business.
Ask yourself questions
It’s tempting to speed up the investment process by using just your intuition to make decisions. Intuition is powerful, but it has its limits. Relying just on intuition doesn’t push you to make creative and important discoveries. Intuition also allows the most dominant and opinionated voice in your head to control the conversation – even when the other voices may have useful ideas to consider. A measured, diligent process that considers each of the following questions gets you that much closer to matching your investment goals with your personal and professional considerations.
What do the expenses vs. income look like?
A business exists to allocate capital for growth for its shareholders while funding existing operations. Where can you gain more accuracy in your understanding of your family expenses? Are the expenses routinely outstripping earned income? Is there room to tighten expenses without changing lifestyle? What is the breakdown of essential, important and discretionary family expenses? Many of the wealthy Boston families that we work with live well below their means – and that’s helped them generate significant wealth as a result.
Who is the decision-maker?
Having a single decision-maker greatly improves the efficiency of the investment process. It doesn’t mean that others are excluded or not considered. The decision-maker is responsible for considering the interested parties and how they are impacted by each decision.
What does temperature check on the family tell us?
Is the family mood generally optimistic, pessimistic, or middle of the road? Is health a factor that may cause stress on the finances or mood of the family? Are family ties strong? Good health and family unity allow for additional risk-taking.
Who is this money for?
This helps establish investment timelines for each stakeholder. Is this money for you and your spouse, or for your children and grandkids? Maybe you’ve already transferred assets into a trust for the next generation, or you’re mentally marking certain assets to transfer further down the road. A longer investment horizon allows for greater risk-taking, especially when it comes to withstanding volatile price swings associated with growth assets.
What do you currently own?
Keeping track of all assets only gets more complicated as wealth grows. Consider retirement accounts, future social security value (which is like owning a future treasury bond), home equity, equity in your business, and the present value of your anticipated earnings. Is the upcoming buy/sell decision an opportunity to increase concentration or spread out the investments through diversification? Despite the brevity of this paragraph, there is a lot of work that goes into this step.
What investment opportunities are out there currently?
Now that we know the expenses vs income, the confidence of the stakeholders and the current portfolio of assets, what current market opportunities present themselves for the buy/sell decision? If there are income needs, there are dividends to be earned in the United States in the 3% range, and outside of the United States in the 4% range. For short term needs, Treasury Bills of less than one year yield 1.7%. If growth is a priority, valuations and growth potential of small stocks remain attractive around the world including the United States, Europe and emerging markets. These are just a very small sample of the examples…
You and the market
Keep in mind that the market is made up of participants with all types of investment needs, just like you in that they want to balance risk and return, but different from you in size, stakeholders, confidence, timeline, etc. You are often buying and selling the same stocks, bonds and alternatives that pensions, endowments and other retail investors utilize. All of those other investors are doing the same calculations of their investment needs, which prompts them to buy or sell at any given time.
By definition it is impossible to detach an investment from its beneficiary so all investments must be evaluated based on the stakeholders. Hiring an advisor and treating your family wealth in like a business can help significantly reduce the emotional impact on the investment decisions. Defining goals is one half of the equation. Finding the right investments is the other half. Send us an email if you would like to know how we work to improve and refine both of those tasks.
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