Simple but true wealth advice: Spend less, save more, says principal of San Rafael's Private Ocean

M. Zach Mangels is an adviser and principal with Private Ocean Wealth Management in San Rafael. Mangels answered questions about wealth management from the Business Journal.

What difference does the age of a client make in what you suggest to them as an investment strategy?

Less than you might think. When age is discussed relative to investment strategy, risk is typically the topic of conversation.

Age can act as a decent rule of thumb for a prototypical investor, but the reality is that a client's capacity to take risk and willingness to take risk are better guides.

For example, a 75-year-old who only requires 2% annual withdrawal from their portfolio and is comfortable withstanding market downturns could have a predominantly stock-oriented portfolio with the goal of investing for his family in the future and for estate -lanning purposes.

Conversely, a 25-year-old planning to purchase a house in five years does not have the capacity to take significant risk with their house savings despite their possible desire to do so. Stock markets may decline during that short period leaving them short on the funds needed for the purchase.

How do you help a client determine what level of risk they are comfortable with when it comes to investing their money? Are there key questions you ask to assess that risk?

Determining a client's comfort with risk is part art and part science.

The scientific component is informed through a risk tolerance questionnaire - we use FinaMetrica - which walks a client through a number of questions to gauge how they would feel and react under different portfolio return scenarios.

This helps me understand how a client approaches risk in a vacuum. The art component is informed through conversations with the client about their past experiences with money.

I frequently ask about their experience and mindset during 2008/2009 - were they sleeping well at night, what investment decisions did they make, do they have any regrets, etc. - because it's such a dramatic and significant event in clients' lives.

I'll also ask about what money was like when they were growing up because so much of our relationship with money is informed by our childhood experiences. These conversations help me understand how a client approaches risk in practice and augments the results of the risk tolerance questionnaire.

With faster technology, algorithms to pick stocks and instantaneous investments, are clients making more frequent moves with their money, not being content to stay with investments for the long haul? What do you tell them if you consider this approach unwise?

Our clients' portfolios are designed with a longer-term perspective in mind and to respond well in any market environment.

As such, I don't see clients making frequent moves in general because they subscribe to our investment strategy. To those few who may want to, I start by framing the discussion around their financial plan - focusing on their personal and financial goals, the trajectory their financial lives are on, and how their existing investment strategy is aligned to help them get where they want to go regardless of short-term market movements.

This is often sufficient to assuage the desire to make frequent moves with their money because it demonstrates that it's not necessary to do so. I also reference academic research, which shows that frequent trading in a portfolio does not result in better outcomes. Some investment managers are successful at this ‘active' style of investing; the vast majority are not, and very, very few have been able to beat their benchmarks over long time periods.

Given that, the logical alternative is to ensure you have an appropriate asset allocation at the outset and then harness the long-term returns that the broad market generously delivers.

What mistakes do you see individual investors making in the current financial climate?

This current financial climate is one that creates a lot of stress and anxiety for investors and understandably so - trade tensions, Brexit, interest rates, inverted yield curves, political uncertainty, the duration of U.S. economic expansion, Fed intervention - I'm giving myself a coronary just thinking about it. I'm kidding, but embedded in that joke is the reality that investing money right now can evoke very strong emotions and negative behaviors.

Acting on these emotions is the single biggest mistake investors can make right now. Doing so causes investors to sell to cash in the belief that ‘this time is different', to buy high and sell low, and to lose focus on the areas of their financial lives they can control (expenses and income) in lieu of the ones they can't (stock market returns).

Investors with well-diversified portfolios, an appropriate mixture of stocks, bonds, and alternative investments based on their personal circumstances, and a long-term perspective will see themselves through this financial climate.

As a perspective-setting exercise for somebody worried about today's financial climate, I would suggest researching the headlines from some random period from the past – say 15 years ago – and looking at a few days of headlines from the general news, and then the market forecasts at that time. It is definitely possible that there were concerns and skepticism about the future. And yet we stand here today with higher global market value than before.

What is your best advice on planning for a financially secure future?

The best advice is so simple that it sounds flippant. However, much like the best advice for getting in shape, it's easy to say but can be hard to put into practice.

The advice is this: spend less than you earn and take advantage of the long-term positive returns of the market as early as possible. If you can adopt this ‘savers' mindset you will be leagues ahead of most people and much further down the road towards your own financially secure future. A person with this mindset is living within their means and has a future-oriented perspective.

What about in retirement when you're often required to spend more than you earn? A lifetime of adopting a savers mindset will carry through into retirement and result in sustainable withdrawal levels from your portfolio. I am being careful not to suggest that a ‘scarcity' mindset is desirable. This often leads to guilt and fear about spending money and that's not healthy either. A ‘savers' mindset means you're able to enjoy the present and spend money on the things that bring you happiness but within reason.