Eggs and Baskets

Eggs and basketI was chatting with my young son, a millennial you see.
He’s telling me how different things are for people his age.
He’s saying; even though there’s no shortage of part-time work, that good jobs—real jobs—are hard to come by.  And those part-time gigs, most of them are menial, low paying positions.

It reminded me of a conference I attended, earlier this year. One of the themes dealt with something called, Millennials in the Workplace. It surprised me to learn that the number of self-employed millennials is, compared to previous generations, uncharacteristically high. I also learned that the reason so many millennials are self-employed is that there’s no other choice. In other words, the job market is bad, so bad that these kids have to carve out a living in some other way. Via-self employment.

But you know what?
In my mind, that’s not a bad thing.
And the reason it’s not a bad thing has to do with eggs and baskets.

When it comes to saving and investing—when it comes to money—who hasn’t heard that age-old maxim, “Don’t put all your eggs in one basket.”

Years ago, I had the brilliant, or so I thought, idea of investing in nothing but bank stocks. My rationale? Great dividend, stable client base, well-managed businesses… What on earth could be wrong with that strategy?
I remember bringing up my idea with a couple of high-powered advisors—one of them a well-known investment journalist.

I still remember one fellow’s (a stock analyst) harsh reply, “You’ll get killed.”
The other guy, the journalist, was somewhat kinder—more gentle.  Shaking his head, he said, “You need to diversify. You just don’t put all your eggs in one basket.”

History, by the way, has proven that those investment know-it-alls knew their stuff. It wouldn’t have been, to put it mildly, a brilliant move.

So yeah, keep your financial eggs in multiple baskets. Wise words. Words I heed to this day.

And yet, and yet. When it comes to careers, why do so many of us want one single job? Talk about eggs in one basket. If you have one employer, you have one source of income. If you lose that employment position, you have zero sources of income. You’re on your own. With no eggs; no basket.

Contrast that to someone—a consultant or a carpenter say—who has three, four, ten clients. One client disappears and, unpleasant as that might be, they’re at least not left standing there. Holding an empty basket. No eggs.

So maybe, just maybe, millennials, whether by fate or by design, are actually onto something. Maybe, with their multiple revenue streams, they’ll have at least one or two eggs. Maybe they can scramble them, boil them, fry them. And naybe, hopefully, they, at least, won’t go hungry.

How Not to Invest

This post is written by guest blogger Peter McMurtry. In this post Peter asks, Are Your Investment Advisor’s Cookie Cutter Asset Mix Recommendations Hurting Your Performance?”

CookieCutter $  Most retail clients are very aware that “asset mix” is the single most important variable in investment performance, but they would be surprised to learn that their advisors largely do not make pro-active investment decisions. Active asset mix investment decisions based on projected returns for each asset class are the exception, not the rule.

It’s all About Compliance
Compliance departments have become so important that they frequently override any actual active asset mix decisions that are made. The analogy is comparable to the medical community in the US that is afraid to perform procedures that are in the best interests of the patients for fear of being sued.

Clients are becoming much more investment savvy than ever before and are more impatient with legal jargon combined with flip marketing phrases. What the clients need, and want, is real advice that can benefit them. What they don’t need are simple strategies that protect their advisors’ interests only. I have seen retail client portfolios with the same asset mix throughout an entire economic and stock market cycle without any recommendations provided whatsoever. This is not investment  management, but purely sales tactics and adherence to strict compliance rules.

Cookie Cutter Investing
Whether your monies are managed by a bank branch, broker or financial planner, your asset mix selection will be a choice of four or five cookie cutter pie charts with titles like Income; Income and Growth; Growth; or Aggressive Growth. Each of these options usually offers a range of minimum and maximum levels of cash, fixed income and equity weights.

Despite their apparent interest in your risk tolerance and time horizon, these categories are essentially created by investment companies’ compliance departments to ensure that they are not sued by any disgruntled clients. Their asset mix selection is solely based on assessing a client’s tolerance for market volatility combined with a review of the age and time frame before any income needs become the number one priority for the client.

100 Minus You
Another traditional asset mix strategy still used by many advisors is to subtract 100 from your age, and this will determine your equity weight exposure. Many years ago I began to manage my grandmother’s monies when she was in her mid eighties. If I had chosen to use the 100 less her age strategy, my grandmother’s stock exposure would have been a maximum of 15%. I decided to actively pick her asset mix and maintained an even balance between stocks and fixed income for the remainder of her life until she went into a nursing home at the age of 103. By maintaining sufficient equity exposure I was able to grow her capital at the rate of inflation and this greatly helped to finance her nursing home expenses when she needed it at the end of her life.

You Deserve Better
Both large institutional pension investment managers and investment counsellors have traditionally actively managed their asset mixes for their clients. It is unfortunate that this is not the norm for retail clients managed by bank branches, brokers and financial planners.

This lack of flexibility, combined with frustration over high management fees and poor performance, are the main reasons that the discount broker industry has flourished in recent years.

Retail clients deserve the same benefits from active asset mix strategies that large pension funds continue to receive, regardless of the type of organization managing their monies.

_______________________________________

Peter McMurtry, B.Com, CFA is an Ottawa-based financial writer with 30 years experience in the financial services industry. Peter has worked, in both Canada and Bermuda, in  capacities including Investment Analyst, Portfolio Manager and Financial Planning.
Look for Peter’s monthly Financial and Investment Newsletter coming soon.
You can contact Peter here: peter.mcmurtry@yahoo.ca