John Hughes was mystified.
He had been in the insurance industry for 30 years, but he had never seen anything quite like this.
His prospective client owned nearly 30 separate life insurance products! All with different amounts and various features.
The man was mystified himself. In fact, that’s why he had called John — to help him figure this all out.
I mean, who has 30 different life insurance policies? It must be someone who is easily influenced or really susceptible to good salespeople.
But that really wasn’t the case at all.
The man who had come to John had a Nobel Prize in Economics. He had been educated at Harvard. He taught at MIT. He had advised Presidents Kennedy and Johnson. This wasn’t your typical consumer or investor. He was a legend in economic circles, and anyone who had taken an economics course in the last 50 years had heard of him because he literally wrote the textbook.
Paul Samuelson had called John Hughes to fix a problem.
Samuelson was stymied. The Nobel laureate was absolutely frozen.
He had accumulated all these insurance policies over the years, and he needed to figure out which ones to keep and which ones to get rid of. He knew it was excessive, but he didn’t know how to fix it. “He had papers scattered all over the room,” John told me, “He’d walk over to one. Pick it up. Look at it a while, then go to another one. It was obvious he needed help.”
Professor Samuelson’s problem certainly wasn’t unique. It’s as if he had put together this football team of great athletes and they were running all over the field without any guidance or coordination. It was a free for all.
What Paul Samuelson really needed was a coach. Someone to manage the big picture.
His problem is quite typical, definitely not something limited to Nobel laureates.
Do You Have a Bunch of Accounts “Running Around”?
Over the years, I’ve seen hundreds, if not thousands, of people’s investments.
Between individual and retirement accounts, they might have a dozen or more different mutual funds. Sometimes they own the same funds or investments in multiple accounts. Or they might have way more exposure to the oil and gas industry than they realize.
What this all comes down to is the fact that there is no one managing the OVERALL risk.
Individual advisors or managers are managing their little piece, but they have no idea what is going on in the other accounts. Nobody has a concept of the big picture.
Even “Large Teams” Can Benefit from a Head Coach
This also happens with large institutions and pension funds. They spread their investments over multiple managers, but hardly ever is there a real someone assigned to manage the overall risk of the portfolio.
Independent studies have found that often pension fund holdings are so strung out that they really don’t know what their overall risk is. There can be major redundancies and issues when there is no manager or coach.
One pension study found that 60% of their advisors’ trades canceled each other out. When one was selling a stock, the other fund manager was buying! They were essentially buying and selling with themselves. Most of these trades could have been eliminated (saving fees) and the investment would be in the same position as where it started.
Is Your Risk Being Properly Managed by a Head Coach?
Having too much in one country or region can also increase overall risk. For most investors, the bulk (if not all) of their assets are in the US market. But it’s been proven, over time, that investing in foreign or international markets can actually decrease risk in a portfolio of investments.
This makes sense because foreign markets don’t always move in tandem with the US stock market.
At this point, my educated guess is that certain International markets will outperform the US over the next 10 years. Possibly by a wide margin.
That’s because they are starting from a much lower base. Stocks in some places, like Japan and Europe, are cheap when compared to the US.
Past Performance Is No Guarantee of Future Results
In our high-flying markets of today, I think managing risk should be at the forefront of every investor’s thinking.
It’s easy for investors to extrapolate the recent past into the future. They think the next 10 years will be just like the last ten. It doesn’t occur to them that markets can stagnate for long periods of time — sometimes decades. The reality is the US stock market has undergone long periods of poor performance.
From the depths of 1929, it took another 24 years before the Dow Jones Industrial average matched its previous high.
From 1966 to 1982, the Dow traded between 600 and 1000. For 16 years, it essentially never moved.
More recently, after the correction of 1999, it took another decade for stocks to exceed the 1998 highs.
And a future headline could read, “From the post-pandemic highs of 2021, it took the market ___ years to reach its high again.”
Who is Coaching Your Team (and managing your risk)?
Like with any team, some managers or coaches love offense and are very good at it. They might love picking stocks or the right sectors at the right time.
But you ignore defense at your own peril.
There’s a saying in football, “Offense gets people in the seats, but defense wins championships.”
Defense in investing is about managing risk.
Ask Yourself These Three Questions to Assess Your Risk
You may have done well investing with an advisor, or even investing on your own. But ask yourself:
- Who is managing my overall risk?
- Do I have a coach or just a bunch of offensive coordinators?
- Do I have anybody who’s playing defense, much less “coaching” it?
In summation:
- Every investor should have a risk manager (or head coach) — someone who can see the redundancies and glaring omissions in your investments or financial life.
- Investing across borders reduces overall risk, not increases it.
- If you have multiple accounts or advisors, chances are no one is thinking about your overall risk. They’re taking care of their own little piece of the pie.
How CSH Approaches Things
At CSH these are some of the things we think about. We look at the big picture, and we look out for what is best for YOU.
We want to be the head coach for our clients — the one who is watching all the moving parts — offense and defense — and making sure the job gets done efficiently and properly.
Oh, and I almost forgot… so, what happened with my friend, John, and Paul Samuelson? John never heard from Paul again. “He just couldn’t make a decision,” John said.
The advisor part of our job is helping you make good decisions. Decisions that are right for you, your unique situation, and your future. And we love our job!
Reach Out to Us!
Do you have questions or concerns about your investments, retirement plan, inheritance, business succession, or wealth management? We are obsessed with doing things well and serving our clients as if they were our own family.
Give us a call at 217-824-4211 or contact us via our website. We’re happy to talk with you!