3 Financial Planning Lessons Learned from a 40-Year Investing Career

April 28, 2016

In my 40 years of investing in the stock market, (I started young, ok?), I have seen changes in the markets and in the places where outperformance lived. I have seen bonds start a multi-decade bull market. I have seen three supersized corrections from the 1987 shot across the bow to the dot com boom and subsequent bust to the most recent global financial crisis. Thus, the financial planning lessons began.

My first investments in the stock market were at the age of twelve. With the help of my parents and some savings, I bought shares in two local companies and anxiously awaited the newspaper daily to see how those investments were doing. In the next few years, one had tripled and one had become a “ten bagger” up 1000%. I was hooked and my path was clear, investing was my passion.

During the 1987 crash, I was just out of college and was fascinated by the biotech industry. My savings were small and so was my skin in the game. While the world panicked and wealth was destroyed on that “Black Monday”, for me it meant opportunity and I loaded up on biotech companies. Those investments also yielded eye popping returns over the upcoming years. Then in 1994 as a portfolio manager of a technology and medical healthcare portfolio, I witnessed the beginning stages of the internet bonanza and participated and enjoyed that ride. However, as my portfolio grew the risks of concentrated positions or even concentration in sectors became too great and I was discovering my own risk tolerance and risk profile.

As a thirty something year old during the dot com period, I was working and had decades ahead of income and I was all about equity investing for the long haul. However, as the technology sector had grown to over 40% of the S&P 500 market cap I was not comfortable with that much exposure to one sector — no matter how thrilled I was with the potential of new technologies. And so, I diversified away into other sectors for my sanity. Thankfully, that mechanical approach saved me from a lot of the carnage that ensued post 1999.

Financial Planning Lessons Learned

Now as a fifty something investor, my risk profile is not as comfortable being all in the equity market. To manage the volatility of my portfolio and to plant those seeds for the post working years ahead, I have reduced my risk assets exposure in equities and junk bonds and increased the allocation to lower risk/ less risky assets such as Government bonds, Investment grade corporate bonds, and cash.

This is my story.

It has been and is still being shaped by early successes, by booms and busts, by the stage of life, and by my personality. It is personal. As such do not expect your investment plan to be cookie cutter.

3 Financial Planning Lessons

As you embark upon your investing career or as you delegate the responsibility to a trusted advisor, remember the following tenets as you build upon your story.

1 = Know and Manage Your Risk. Spread your eggs around to protect the nest egg.

Diversification and Asset Allocation are the industry words that describe this point. Diversification amongst securities and amongst sectors removes security specific risks and is generally accepted as a “no brainer” step one. Asset Allocation has been cited in numerous studies to be the single most important factor accounting for 75-90% of the portfolio’s performance. How you allocate amongst the risk assets and the riskless assets plays into volatility of returns and the expected returns of your portfolio.

Sometimes risk is defined by percentages, sometimes dollars, and sometimes lost opportunities. Is it a 20% drawdown in which sleep gets hard to come by? Is it a $20,000 drawdown or a $200,000 drawdown? Is it: Can I not retire at 65? Or will I not be able to take the trip?

Risk is personal and once you can define it you must manage around it.

2 = Be cognizant of Time. If you have plenty of it, time heals all wounds and most drawdowns.

Compounding and a long time horizon combined do wonderful things to promoting investing success. In addition, when the time horizon is long, investing mistakes can be remedied or lessened. Lastly, history has demonstrated that there is an upward bias to the stock markets. Markets have corrected and markets have crashed, but over the time period 1928-2018 the S&P 500 (with dividends) has a geometric return of over 9%. That fact gives credibility to the premise that if you can stomach the volatility, equity markets will recover.

Conversely, when the investing time horizon shortens the margin of error and investor vulnerability to a market setback heightens. Without the luxury of time, recovery will be more difficult.

When time is on your side, risky assets can be included in a portfolio to a larger degree than when the years ahead are less.

3 = Stay Rational. Emotion is the antithesis of reason and the destroyer of wealth.

Investing on emotion is not a preferred approach nor is it repeatable and definable. Although the adage — “be fearful when others are greedy and be greedy when others are fearful” — speaks of emotions it indicates to me discipline and the importance of a plan. When the inevitable equity drawdowns of 20% happen, the disciplined investor knowing of the upward bias of the markets will step up to buy versus the emotional investor who taps out pledging to reenter at a better time.

Plan your investing and invest according to your plan.

DisclosureThis information is intended for educational purposes only and should not be construed as advice. You should discuss your circumstances with a qualified financial professional prior to making any decisions.

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