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.