Don’t Get Mad. Get Real.

Life is unfair. But what if there’s a way to tip the cosmic scales of justice in your favor, at least when it comes to money?

A new advertising campaign for a retail brokerage company implies that the difference between your mundane existence and the undeserving bosses, snobs, and idiots who are living the high life can be rectified when you sign up for their self-directed investing services. Some of the tag lines:

The harder you work, the nicer the vacation your boss goes on. Don’t get mad. Get _____________.

First class is there to remind you: you’re not first class. Don’t get mad. Get _____________.

The dumbest guy in high school just got a boat. Don’t get mad. Get _____________.

 (“____________” is the name of the company. It has been omitted to protect the guilty.)

 The ads are snarky, and tongue-in-cheek funny. But they are also disingenuous, and right at the edge of being dishonest. Sure, it is possible that do-it-yourself investing could be a ticket to a life of luxury, but the same could be said about playing the lottery. Is it plausible to believe that DIY investing is a proven strategy for enjoying fabulous wealth? Possible, yes, proven, no.

These platforms for individual investors represent a small segment of the financial services and products available to retail consumers. But the marketing approach plays to (and reinforces) some of the misconceptions the public often has about the products and services provided by banks, insurance and investment companies, and financial professionals. And while they might want to believe they could be the lucky one who turns modest savings into fabulous wealth, most consumers would be better off if they interacted with financial institutions and professionals on more realistic terms. For instance: 

1. It’s “Wealth Management,” Not “Wealth Creation”

To “create” literally means to make something out of nothing. Wealth creation is what happens when a college student’s idea becomes Facebook.

Wealth management is what happens when financial institutions and professionals provide products and services to increase returns on, or the benefits from, existing assets. Borrowing can leverage assets, insurance can protect them, and investments may make them grow larger. But individuals must have assets to manage – income, savings, businesses, property, etc.

The benefits from wealth management can be substantial, but it doesn’t transform paupers into multi-millionaires overnight. Think about all the wealthy people you know. Invariably, the origin of their wealth was their income, profits from businesses or transactions, or inheritance – not a miracle, a “secret,” or a lucky accident.

2. Real returns are lower than you expect, but also better than you think.

Every year, someone hits a wealth management “home run,” reaping returns in excess of historical averages. These outliers get our attention, but also distort expectations. When we hear that someone earned 15 percent last year, we wonder: “If they did it, why can’t I?” and, “If it happened once, why can’t it happen again?” And from those assumptions, we construct a rationale for reasonably expecting (or at least hoping for) 15 percent every year. This is simplistic foolishness.

No asset class produces above-average returns year after year; annual performances regress to their historical means – which in some cases, includes negative returns. With this variability, the only way to achieve above-average returns year after year is to keep picking new winners from different types of investments. Hindsight might convince you this active management approach can work, but studies repeatedly find that it underperforms the average returns that come from simply holding an investment through its fluctuations.

Don’t buy the hype that a financial or investment firm holds the magic formula to “wealth creation.”

Besides the impossibility of repeatedly selecting the highest-performing asset classes, individual investors have built-in costs, such as fees and taxes, which diminish returns. And inflation is another factor that indirectly erodes accumulation values.

For the past three decades, Thornburg Asset Management has produced reports on the historical “Real Real” returns (i.e., the net return after fees, taxes and inflation have been subtracted) for different assets classes over 1-, 5-, 10-, 15-, 20- and 30-year periods. Once you get past the one-year numbers, the longer-term annual returns are between 3 and 7 percent. To repeat: 3 and 7 percent.

These numbers might seem low until you realize that the annual rate of inflation for the 30-year period ending 2015 was 2.7 percent. One of the main objectives of wealth management is to have savings retain their purchasing power by keeping pace with inflation. Average annual returns of 3 to 7 percent may seem paltry, but even the low end of real real returns outperforms inflation.

Acknowledging that every year someone, somewhere, experiences above-average returns, expecting net returns between 3 and 7 percent is more realistic. And that is often good enough to ensure that today’s accumulations retain their future value.  

3. Accumulation is only one phase of wealth management

Accumulation is an essential part of wealth management, and probably the easiest to execute: You pick a product, deposit money. Lather, rinse, repeat. It is also the simplest to evaluate: Calculate the rate of return, and/or see if the pile is big enough to meet your objective.

Because it’s simple and essential, and because there are a lot of choices, accumulation gets a lot of attention. But there are other aspects of wealth management. These items aren’t always as easy to assess or execute, but can have a greater impact.

Cost management. If your investment account is earning 7 percent, but you are paying 15 percent interest on a credit card balance, are you making or losing money? A crucial part of wealth management is accounting for costs, and finding ways to either minimize or eliminate them.

Better cost management improves cash flow, which either makes today’s standard of living better, or effectively increases investment returns because more money can be set aside for the future.

Asset preservation. One of the best ways to keep your wealth plans moving forward is to avoid any backward steps. Losses can cripple accumulation plans; if an account declines five percent this year, it must earn over seven percent per year for the next three years just to average four percent. And sometimes a guaranteed return is better than an opportunity for a bigger one, especially for those nearing retirement.

A bigger wealth management threat is losing income that makes accumulation possible. If your wealth accumulation plans rely on ongoing deposits, life and disability insurance are essential considerations.

Preservation is also paramount during the distribution phase of wealth management, because while it’s difficult to overcome a loss during accumulation, it can be devastating to encounter the same event in retirement. For financial security, monthly payments guaranteed for life can be priceless.  

Distribution. Accumulation and distribution are like two halves of a football game; having the lead at halftime is good, but the most important time to be ahead is at the end. The first half of wealth management is accumulation, the second half is distribution, i.e., figuring out how to best spend or pass on what’s been stored up. The way you have accumulated can impact how much you can spend; sometimes, the wealth management plan that appeared to be behind at halftime ends up dominating the distribution phase.

Don’t Get Mad. Get Real.

In many personal economies, cost management, preservation and distribution get shortchanged. It can be tempting to think these not-so-simple aspects of wealth management can be resolved by finding a secret formula for having so much money you don’t have to deal with them. That’s madness.

So don’t get mad. Get real.

- Real returns based on realistic expectations.

- Real protection against real threats to your
     wealth-building resources.

- Real security that leads to real enjoyment
     during the distribution phase of wealth
     management.

And get real wealth management.

This blog post is prepared by an independent third party for distribution by your Representative(s). Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice. Links to other sites are for your convenience in locating related information and services. The Representative(s) does not maintain these other sites and has no control over the organizations that maintain the sites or the information, products or services these organizations provide. The Representative(s) expressly disclaims any responsibility for the content, the accuracy of the information or the quality of products or services provided by the organizations that maintain these sites. The Representative(s) does not recommend or endorse these organizations or their products or services in any way. We have not reviewed or approved the above-referenced publications nor recommend or endorse them in any way.

Lifetime Financial Growth is an Agency of The Guardian Life Insurance Company of America (Guardian), New York, NY. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC. PAS is an indirect, wholly-owned subsidiary of Guardian. Lifetime Financial Growth is not an affiliate or subsidiary of PAS or Guardian. 2017-51110 Exp. 12/2019