‘Fundamentals of building wealth … remained constant’
March 23 marked my 30th anniversary working in trust departments. A great many things have changed over the years. From a technological standpoint, I experienced the transition from typewriters and word processers to desktop computers, the internet, cell phones and social networks. From an investment standpoint, securities have proliferated with a myriad of derivatives, futures, Collateralized Mortgage Obligations, and Credit Default Swaps to name a few.
The number of investment vehicles has likewise multiplied with hedge funds, ETFs, and sector mutual funds available in every shape, size, and description. As a result, the approximately 6,500 stocks traded on major U.S. exchanges are packaged in an avalanche of over 30,000 investment funds and pooled accounts. This is clearly a case of quantity over quality.
A commonly held belief thirty years ago was that through intelligence and hard work, an investor could consistently earn a profit by purchasing a few mispriced securities before other intelligent and hard working investors bid these prices up to their fair market value. This belief has since been convincingly debunked in study after study.
And although the percentage of assets invested in passively managed funds and ETF’s has risen steadily over the last three decades, the vast majority of investors are still searching for that sure-fire scheme to beat the market.
While it is true that many have learned the hard lesson of the last two bear markets that their stock picking and market timing activities actually detracted from their investment results, far too many decided that if they could not beat the market, they could find a manager who could. The truth is that finding someone to succeed at stock picking and market timing has proven to be just as elusive as doing it yourself -- intelligence and hard work notwithstanding.
Another change is that family relationships are more complex and dynamic than ever due in part to increased longevity. This has added complications to some already strained family relationships as many baby boomers are having to manage their parents’ health care and financial needs. This comes at a time when many boomers are worried about how to plan and fund their own retirement.
A well thought out estate plan, in partnership with an experienced successor trustee, can add both value and peace of mind to the day-to-day financial management of many seniors and their families. Unfortunately, far too many people do not have an up to date trust (or even a will), nor have they discussed the tax and financial management advantages of having a family trust with an estate planning attorney.
Although much has changed, much has not. The prudent investment principles of diversification and asset allocation are as important today as ever. The keys to successful wealth management have not changed in thirty years. With all of the advances in technology and the availability of investment funds, asset classes, and investment advisors, the fundamentals of building and preserving wealth have remained constant:
1. Save more and spend less
2. Have adequate short term reserves for money you may need within one year or less
3. Limit taxes by investing through IRA’s and 401(k) plans to the greatest extent possible