All Things Financial Planning Blog

“You can always tell a Harvard man…”

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I sometimes wonder if we don’t trip ourselves up with our supposed intelligence and constant search for a way to make our future more secure. Did you ever wonder if maybe the KISS (Keep It Simple, Stupid!) principle is the right way to plan for the future? By definition (think of your own experience) the future is unknowable to any of us. I suggest we too often add to the confusion and noise by being too smart for our own good and coming up with really complex ways to try to beat the odds.

For instance, the New York Times recently reported on a study of 2009 endowment results released by the National Association of College & University Business Officers and Commonfund showing that during the stock market turmoil last year, the endowment fund at Harvard lost $11 billion dollars, dropping 30 percent. The nine universities with the next highest endowments also suffered losses from 29 percent to 23 percent. During the same period however, the managers of these 10 biggest college endowments increased their allocations (as a group) in what’s called “alternative investments” from an average of 52 percent to 61 percent of their total portfolio. At smaller schools with less than $25 million, alternative investments were only 13 percent in 2009, up 2 percent from the previous year.

I read this with amazement, since the people who manage these huge endowments at some of the most competitive schools in America are obviously among the best and brightest investment managers in the world. How can it be that they, with all their brains and resources, could do so much worse than the average balanced investor? For instance, the Vanguard Wellington Fund – a mutual fund that uses a simple asset allocation of 65 percent equities and 35 percent in bonds and is available to most individual investors – earned a 22 percent gain in 2009!

The answer must lie in the heavy reliance the endowment managers put on alternative investments. Within alternative strategies used by the endowment managers, the asset mix was:

  • Private equity: 21 percent
  • Marketable alternative strategies: 43 percent
  • Venture capital: 7 percent
  • Private equity real estate: 12 percent
  • Energy and natural resources: 12 percent
  • Distressed debt: 5 percent

OK, what’s so compelling about those “marketable alternative strategies”? Well, turns out it is some old friends that we’ve all been reading about in the news; nasty things like derivatives, hedge funds and other complex strategies invented by some really smart people to try to beat the market (and by the way, usually make themselves gobs of money from high fees and incentives, in a sort of “heads you lose, tails I win” way).

What does this all mean to you and me? Well, for me, the older I get the more I realize that simplicity is often the best strategy in planning for my future. Back in the 13th century William of Occam posited that the simplest explanation to a problem is usually the best. The great physicist Albert Einstein put it another way: “Make everything as simple as possible, but not simpler.”

So what does being simple mean for my financial life planning?

Well, first I try to keep my investment portfolio really simple, using low-cost passively managed (or index) mutual funds and exchange traded funds (ETFs) in a globally diversified portfolio of equity & high-quality short-term bonds. Nothing sexy or fancy – no “marketable alternative strategies”!

Second, since my ability to grasp what my future might look like goes out about five years, I focus on my cash flow during those five out years. I think about what my income should be, how much I know I will have to spend, what I might be surprised by and then add a 10 percent cushion for stuff that comes completely out of the blue. The stuff that’s really far out is way too fuzzy for me to worry about now.

Third, we make sure that no-one or nothing can take away the “stuff” of our life that is necessary or precious. Our home mortgage is paid off. Our credit card (we have only one) is paid off every month. Our health insurance is paid on time and Health Savings Account is funded. We take time to keep our relationships with families, friends and each other strong, and get great joy out of each day of our lives. Albert Einstein also said something else of great wisdom:”Not everything that counts in life can be counted.”

So, I challenge you. Make your life more simple, one small step at a time. You’ll like how you feel.

By the way, the complete quote at the top is: “You can always tell a Harvard man, but you can’t tell him much!” (This was obviously written before Harvard was a co-ed school.)

Sam Hull, CFP®, ACC
Partner
Whitewater Transitions, LLC
Arundel, ME

Author: Sam Hull, CFP®, ACC

Sam Hull is the founder of Whitewater Transitions, LLC, a coaching and consulting firm based in Arundel, ME. Whitewater helps financial advisory practice owners in the planning & sale of business ownership and in the subsequent transition into a new phase of life. Sam is a certified professional business & life coach as well as a CFP® licensee. Sam is certified by the International Coach Federation (ICF) as an Associate Certified Coach (“ACC”). He has been a CFP® (Certified Financial Planner) license since 1995. Sam was the founding Principal of Northstar Financial Planning, Inc. from 1994 until April 2008, when he sold his ownership in the company. Northstar provided financial life planning & wealth management services to high net worth clients. Northstar has been regularly named by Bloomberg Wealth Manager Magazine as one of the 500 “Top Dogs” in its annual listing of leading wealth managers.

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