If there’s a bustle in your hedgerow,
Don’t be alarmed now,
It’s just a spring clean for the May queen…
If you have any idea what Robert Plant is talking about here, feel free to let me know. But, esoteric lyrics notwithstanding, there are some good retirement planning lessons we can learn from Led Zeppelin’s “Stairway to Heaven,” believe it or not…
1) Stairway to Heaven, arguably the most famous rock song of all time, was never released as a single to the general public. For several weeks (maybe months) after it was first introduced, you couldn’t even hear it by buying the entire album, because the album hadn’t been released yet. Literally the only way to hear the song was on the radio. Eventually, you could buy Zeppelin’s untitled fourth studio album (often known simply as Led Zeppelin IV) if you wanted to be able to hear the song whenever you wanted.
So what does this have to do with your financial planning?
Well, just as the radio stations of the day initially served as the only conduit between the artist and the consumer, there are some things in the financial world that you just can’t access without professional help.
As an example, I was talking with someone recently—we’ll call him Jimmy—who decided that he’d discovered a shortcut to assembling his portfolio. Jimmy’s brother was working with a financial advisor who had constructed a relatively well-diversified portfolio of mutual funds for him. So Jimmy said to his brother, “Look, just show me what this guy has you invested in and I’ll put together a portfolio that looks identical, but I won’t have to pay any fees or commissions to an advisor.”
So that’s what he did. He picked the exact same funds, weighted with the exact same allocation as his brother’s account.
Fast forward two years. His brother’s account was up 7.2%. But Jimmy’s account was only up 5.6%.
So what happened?
What Jimmy didn’t realize was that the advisor was buying institutional shares for his brother, which meant the internal costs of the funds were much lower. Jimmy was buying the exact same funds (or, at least, they had the same name), but he didn’t have access to the institutional shares. Essentially, Jimmy was buying the funds at retail while his brother was getting them at wholesale. And over the course of just a couple of years, that made a pretty substantial difference in his portfolio.
2) John Paul Jones elected to not use a bass guitar on Stairway to Heaven because he thought the song sounded more like a folk tune and the bass wouldn’t really fit. So instead, he added a string section, keyboards, and flutes. Very different from anything Zeppelin had done in the past, but it worked perfectly in this instance.
At some point in your financial life, you’re going to reach a point where you can’t just keep doing the same thing you’ve always done.
Most people usually reach this point once they get within 5-10 years of retirement. At this stage, I generally start to hear statements like…
“At this point, I don’t have a very high risk tolerance.” Or…
“We’re not that interested in making a lot more money, we just don’t want to lose.”
Some people adopt that mindset earlier than they probably should, and some arrive there much later than they should (or they never shift their mindset at all).
The problem is that most people intuitively and emotionally know that they need to be doing something different, they’re just not sure how to tangibly make it happen. In other words, they know that the bass guitar isn’t a good fit for the song they’re currently singing, they just have no idea how to work in the string section instead.
And, of course, that’s what we’re here for. So, to quote Stairway to Heaven once again…
Yes, there are two paths you can go by
But in the long run
There’s still time to change the road you’re on…
The Tightwad and his Stack of Benjamins
There’s an old fable called “The Miser and his Gold” that has an important financial lesson for us to learn. But to make it more interesting (and updated with 21st century language), we’re changing it to “The Tightwad and his Stack of Benjamins.” It goes something like this…
Once upon a time, there was a tightwad who used to hide his stack of Benjamins at the foot of a tree in his garden. Every week he’d go and dig it up and gloat over his riches. After gloating for a while, he’d bury his stack of Benjamins back in the dirt.
A robber noticed this, snuck over during the night, dug up the stack of Benjamins and ran off with the tightwad’s wealth.
A few days later when the tightwad came to gloat over his stack of Benjamins, he found nothing but an empty hole. He screamed so loudly that the neighbors came to see what was wrong. He told them how he used to come visit his stack of Benjamins and enjoy looking at it.
“Did you ever take any of it out to go buy things with it?” one of them asked.
“No,” he said. “I only came to look at it.”
“Well, come over here and look at the hole where it used to be,” one of his neighbors told him. “It will do you just as much good.”
The moral of the story? Wealth unused might as well not exist. Having money for the sake of having money is a pretty useless activity. Money is only useful to the extent that we put it to use. It’s called currency for a reason. The root word there is current. That means it should be moving, not stagnant.
In helping people construct their retirement plans, I come across a lot of examples of money that doesn’t have a current. Here’s just a couple of cases…
1) Money in the Bank
There’s no disputing that everybody needs an emergency fund. It’s also a good idea to have money in the bank that’s earmarked for a certain purpose—like maybe a new car that you’ll be buying in a few months or the family vacation you’ll be taking later this year.
If you own a lot of rental property, it might make sense to have a bigger-than-average emergency fund to cover those months where you have a tenant vacancy or a lot of repairs that you have to do.
But at some point, too much money in the bank is a detriment. Even if you’re earning an interest rate of 1% (which is actually relatively generous in today’s interest rate environment), you’re actually losing money. Inflation hums along at a rate of about 3%. That means you’re losing 2% in buying power every year with that money that’s sitting in the bank collecting dust.
2) Unused Inheritance
Inheritances can be tricky. Some people get an inheritance and can’t sit on it for even a year before they’ve blown through it.
For other people, an inheritance comes with a lot of emotions attached to it. Sometimes I’ll hear statements like this…
“This is the money dad spent his entire life cultivating. I don’t want to do anything different with it because he’d be mad at me if I lost it.”
Or...
”My parents were always good with money and I’m not, so I’m just going to leave it alone and not make any changes to how they invested it.”
And so the money sits there with no real direction or mission. Usually, statements like this are just a different way of saying, “My parents are gone and this money is the only part of them I have left so if I just leave it sitting here, it will be like my parents are still around.”
Understandable. And I’m not saying that you have to go out and make sweeping changes to your dad’s portfolio right after you stop by the funeral home and write the check for his burial. But too often, I see people afraid to do anything at all with their inheritance, for years and years, because of all the emotions tied up in it.
Two things for you to consider if you’re in that boat:
First of all, if your parents did well enough financially to leave you any sort of substantial inheritance, they probably didn’t do it by ignoring their money and hoping things worked out for the best. They probably worked really hard, saved very intentionally, and invested intelligently to build their wealth. So sticking your head in the sand and trying to avoid the emotions connected to this money isn’t really an approach that’s in harmony with their philosophy.
Secondly, if they wanted to pass money on to you (instead of spending it all themselves), they probably didn’t do it hoping that this money would be a burden that carries a lot of emotional baggage for you. They probably wanted it to positively impact your life. So…take the necessary steps to figure out how to best make that happen.
Or just go dig a hole in your backyard and stare at it every day. Whichever works best for you.
The Baby in the Front Seat
“I really hope that’s a doll and not an actual baby,” I told Molly.
We were headed east on I-40 when I saw the baby’s head leaned up against the window. The van was in the lane to our left and a couple of car lengths ahead of us. There were two older kids in the back, but we just couldn’t quite tell if that was a real baby in the front seat or not.
We assumed that it was probably a doll because of the position of the head. If it was a baby, that would be a really awkward way to be holding it (as if there’s a way to hold a baby in the front seat of a minivan traveling 75 mph on the interstate that isn’t awkward).
So after an initial panic, we came to the conclusion that it was just a doll. No need to alert the authorities.
And then…it moved.
The baby’s head moved! It was now clear that this wasn’t a doll. This was a baby.
We started discussing our options. Are we supposed to alert the local gendarme? Do we just mind our own business and let these wildly irresponsible folks go about their day? What’s the protocol for this?
As we were mulling over our options, the van merged over in front of us. So I took the opportunity to pull over into the left lane and pull up beside them so that Molly could at least give them a nasty look.
As soon as we got right up beside them, Molly looked over, prepared to give her most scornful, judgmental you-can’t-possibly-be-serious scowl.
And then she started laughing hysterically.
“It’s his knee,” she said. “It’s not a baby, it’s the guy’s knee.”
Crisis averted. And we were pretty glad that we didn’t call the police to report these reprobates with an infant in the front seat.
So what’s the lesson here? The lesson is that sometimes you need to inspect the situation a little more deeply before you start jumping to conclusions. And we see examples of that all the time in the financial world. Here’s just two of them….
1) “The market was up big but my account didn’t grow much last year!”
At first blush, this might seem problematic. But it’s important to take a step back and understand why your account didn’t grow much. Is it because it’s poorly allocated, or is the slow growth by design?
If you need that money in just a couple of years, you want it to be invested conservatively, instead of following the market. So that lack of growth should be coming with a trade-off in the form of reduced volatility or downside. Looking a little deeper will help you determine if the lack of growth is intentional, or the result of incompetence.
2) “My fees are too high—I found another advisor who will charge me less!”
Too often, people get too fixated on what fee their advisor is charging and don’t pay enough attention to what they’re actually getting in return.
Here’s a good example to illustrate the point. Suppose you’re looking for a landscaping company to take care of your yard. One company is going to charge $100/month, while the other one charges $135/month. Which one is better?
The answer seems obvious, right?
But what if we dig a little deeper and determine that the services aren’t exactly the same? The first company is going to show up once a week and mow the grass. That’s what you get for $100/month.
The second company is going to mow the grass, but they’re also going to run the edger around the driveway and the sidewalk, weed eat along the fence around the back of the house, and pick up trash by the road. They’re going to come by every week in the fall and rake leaves. They’ll re-seed in the winter and fertilize in the spring. And they’ll come by twice a year and trim the hedges.
Suddenly that $135/month fee sounds pretty good compared to the guy who’s charging $100, but only mowing the yard and nothing else.
So let’s put that in a financial context. Suppose you have an advisor who says they’ll manage your account for a 1% fee. Are they providing any other services in addition to managing that specific account?
What if somebody else is charging 1.25%, or maybe even 1.5% or 1.75%. Are those people also just managing the account? Or are they providing advice on how you should allocate your 401k? Helping you make decisions about Social Security or pensions? Helping you with cash management, long term care planning, or estate planning? Giving you tax advice?
There’s not a specific menu of services that automatically justifies a certain fee. But it’s important that you have an apples-to-apples discussion if you’re comparing one fee/advisor to another.
So before you freak out about the baby in the front seat of your portfolio, dig a little bit deeper. If it’s just a knee, there’s no need to work yourself into a lather.
The Great Suit Caper of 2017
My friend Zack got married last Saturday in Greenville, South Carolina. He’s the life of the party wherever he goes, so he has a deep pool of friends. I was one of his 10 groomsmen.
We all ordered matching suits from Jos A Bank (believe it or not they had a special going on). We were told that the suits would be shipped to our house and then we’d just need to go get them tailored.
As of February 25 (two weeks before the wedding), I still hadn’t gotten a suit. So I stopped by Jos A Bank to see what was up. After they called around to a couple of different stores and eventually got in touch with FedEx to track the shipping, we determined that the suit had actually been shipped to my old house in Hillsborough. I haven’t lived there in three years, but Zack apparently didn’t have my current address so that’s what he gave them. So I had to drive up to Hillsborough and knock on their door. Sure enough, my suit had been sitting in their living room for three weeks while they tried to figure out what they were supposed to do with it.
So now I was in a rush to get it tailored so that I could get it back in time. Picked it up just a few days before the wedding and stuck it in my closet with a full three days to spare. Crisis averted.
Fast forward to Saturday. The wedding party was supposed to be at the venue two hours before the ceremony. So there’s all 10 of the groomsmen hanging out in the parking lot. We’d been there about an hour when Sam grabbed my jacket sleeve and held it up next to his.
“Why do our suits look different?” he wanted to know.
They were similar, but slightly different colors, and definitely different texture. I looked around. His suit looked like everybody else’s, mine didn’t. So I peeked inside at my tag.
Van Heusen. Not Jos A Bank.
After all the rushing around and driving to Hillsborough and paying extra to expedite the tailoring, I’d grabbed the wrong suit out of my closet when I was packing. And now I was almost four hours from home with a wedding starting in an hour, and I’m in the wrong suit.
Suffice it to say that the rest of the wedding party got a good laugh out of it. We decided that we wouldn’t be mentioning this to the bride just yet. It’s something that will be funny in a few weeks, but not at that moment.
It turned out to not be a big deal. It was one of those situations where you wouldn’t really know that something was amiss unless you were specifically looking for it. I was the tallest of the ten groomsmen, so I was at the far end of the line during the ceremony, seemingly a football field away from Zack.
And let’s be honest. Nobody at a wedding is paying any attention to Groomsman #10.
So other than the people that I couldn’t resist telling (which actually was quite a few), nobody knew the difference. We’ll see how the pictures look in a few weeks.
But in a lot of ways, that whole situation reminds me of a retirement plan.
In any given year (assuming your portfolio is invested intelligently), you’re going to have some investments that perform incredibly well. And you’re going to have some that aren’t looking so great—investments that are wearing the wrong suit, if you will.
But that’s ok. Because the next year, that investment that performed incredibly well this year might be in the toilet. And this year’s stinker might be the winner next year. That’s why you don’t go all-in on any one particular strategy,.
To quote my friend Bob Payne at Payne Capital Management, “I don’t know what asset class is going to be up in value next year, but I know that our portfolios are going to have some of it.”
If you’re having a wedding, it’s inevitable that something is going to go wrong along the way. (Hopefully I won’t be the one responsible for it every time). But if the sound system is working and the bride doesn’t trip and fall and the food is good, nobody is going to notice the goober in the Van Heusen suit who’s supposed to be wearing Jos A Bank.
In your portfolio, it’s inevitable that you’re going to have something that goes wrong. But as long as you planned well, you’re going to have a lot more things that turn out just fine.
Anyway, sorry about that, Zack and Nicole. I’m sure you’ll still make beautiful children anyway.