The Speed of Noise

Have you ever loved silence, at least once in a while?

When we sit out on the front portal at our home in Santa Fe, it is so quiet it’s hard to get used to. Silence, clear silence. Quiet, stillness. It takes awhile to get used to it because I’m too often rushing, or if not technically rushing, doing, thinking, planning, whatever.

But how to stop, ah that’s the question?

There is a lot of noise in our lives, particularly from all the 24 hour news sources, too often contradicting each other, which amplifies the pitch of the noise. It’s not just hard to cope with; it’s actually impossible. So often we tune out or turn it off. I once read a bumper sticker that said, “Television — the more you watch the less you know.”

We have a lot of this noise in our world of financial services. Some, for instance, make a clear case for, say, emerging markets. Others say it’s ready for a crash. It’s interesting that the language is always boom or bust, —great gains or crash—never, “We think it will do fine and worth the investment” or, “We’d lighten up because we think there are other areas of investment more promising.” Nope. Always seems to be boom or bust.

Bonds are good (if the right kind of bonds) or bonds are bad no matter what kind of bond.

Growth over value, but value is coming back.

Cash is king, or cash will ruin your long-term financial future.

Whoa, geez. What to do?

Turn off your TV?

We feel, no matter how one tries to make sense of all this too often contradictory noise is to think about time horizon. For instance, if I need money in 6-12 months for a new car, probably cash is best for that “investment.” If, however, I’m trying to fund a college education that is 15 years away, retirement that is 20+ years away, cash would probably not be the best choice. If I’m retired already and now, instead of accumulating funds for the future, the future is here and I’m now in the distribution phase, I’m spending now rather than saving. This provides a special set of thought because even if I retired at, say age 65, I have to plan for 20 to 30 years. FYI, my dad is 95. We have two clients over 100. More to follow I’m sure.

So what to do?

As we all know, there are many risks. There’s liquidity risk—having too much of my wealth tied up in bricks-and-mortar. We’ve often said, you can’t sell a door or a window to pay for a medical expense.

There’s credit risk—will the company or municipality that issued that stock or bond go belly-up?

There’s time-value of money risk where the cost of things in the future will cost more than they do now so I need to at least keep up with inflation (on an after-tax basis too). This is why cash isn’t a very good long-term investment.

Then, of course, there’s the ever present, if not noise volatility risk: markets go up and down, sometimes a lot. You’ve heard us say, however, that over the many years we’ve been doing this we’ve found that all clients (yeah, pretty much all) love volatility. The only problem is they only like it in one direction. We call this normal behavior.

Now if you’re not in the distribution phase but rather the savings and investment phase of your life, you can ride out the ups-and-downs because you don’t need the money for ten or more years. But if you’re in the distribution or spending phase of your life, you have to pay attention—we have to pay attention. The dilemma is two things.

Longevity Risk—living to 95+. Will my money last on an after-tax, inflation adjusted basis to support all the spending for all the things I want to do? I can’t just be in cash but then I can’t just be in the more volatile stocks.

This brings us to what we call sequence of return risk. What’s that? It’s the issue of having to take money out of your account when the account is down. The idea is this: investments go up and down (we want only up but have to deal with down too). If I’m systematically taking money out of my account(s) when things are up (and positive sequence) I’m okay, I’m kinda spending the profit or gain. But when the next sequence of return is down, I’ve got a double negative: I’m reducing the account due to my withdrawal AND the account is reduced by a down market. Even if this situation is temporary, the double negative is still problematic.

Sure, people can adjust their spending patterns and often do. We put off buying that new car, or taking that vacation, eating in more, perhaps more peanut butter and jelly sandwiches. But there’s still only so much one can do.

For some, sequence of return risk isn’t much of a problem because they’re still in the accumulation phase of life, saving and investing for the longer term (remember, though, not that new car). But for many, sequence of return risk along with longevity risk is an important consideration to understand and manage.

This can keep us up at night.

Risk, any risk, is like a leaky valve. I remember an Apollo space scientist who once said, “There is no such thing as a leakless valve; all valves leak. The project is to control the leak.”

This is why we use our GPM (Goal Planning & Monitoring) program as one way to try to get a handle on all these risks and manage them appropriately for our clients—that would be you! And as you have heard us say over and over again, the “M” in GPM is probably the most important letter in the acronym because it stands for monitoring.

It’s like this. If we built the perfect boat with perfect GPS directional technology and pushed you off Ledbetter beach toward the goal of Anacapa Island, if we never saw you again, due to the winds and currents you’d probably not get to Anacapa Island. Maybe Mexico but not Anacapa. Now Mexico is a wonderful place to go, but not if your goal was Anacapa Island. So we’d have to tack your boat to the right, sometimes to the left in order to keep you on course. Sometimes that might be often, sometimes less often but it would not be never.

Look, it’s not a perfect tool. There is no perfect tool; there is no perfect plan. But it’s an important tool.

Now slow down, turn off your TV and find a nice quiet place to sit and read a book—a real book, something with paper pages.

Views expressed are not necessarily those of Raymond James and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The projections or other information generated by Goal Planning & Monitoring regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.