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In Christianity alone, it is estimated that there are thousands, if not thousands, of different sects around the world. Each denomination has its own interpretation of the Bible and its best application.
If you have ever been a part of this world, you will know that members of many sects actually “die on that hill” for various individual tenets of their faith. I wonder how this harsh stance draws more people to the singular figure spoken of in every song and sermon, or whether this division is repellent. I’ve often wondered if it’s more about the denominator.
I’ve observed (and sometimes displayed, TBH) a similar level of religious fervor that many financial companies, advisors, and gurus have for their respective investment philosophies. Active vs. passive, efficient vs. inefficient, aggressive vs. conservative, ETFs vs. funds, traditional vs. alternatives, private equity vs. hedge funds, fee-only vs. fee-based vs. commission, and are pensions a virtue or a vice, advisors started !
Interestingly, the missing element in all this discussion is the client’s needs and desires. Every advisory firm on the planet touts their “client-centric” credentials, but instead of helping individual investors create truly personalized portfolios, most of these firms I would wager that they are in the business of imposing their investment principles on their parishioners. .
There’s nothing wrong with an advisor applying a systematic approach to investment research and execution.But wouldn’t it be better if the same amount of care was taken in learning about investing?or than investmentMens? And is it possible that what’s best for one investor is very different from another??
I think most advisors who have been in this business long enough will freely admit that their clients’ lives, personalities, careers, families, needs, and desires are very different. But they may have to admit off the record that their portfolios should too.
The problem is that while templates and models make it much easier, the blank canvas investing approach is very difficult to scale. I think the secret to finding such solutions is to change our framework from investment characteristics to human characteristics.
For example, I have never met a client who was born with an innate need to overemphasize small companies in the pursuit of outperforming the S&P 500 in basis points. But I’m sure you remember Maslow’s Hierarchy of Needs from your high school days. Now, a group of psychologists and behavioral investors (Laura Lopez in 1987, Hirsch Shefrin and Meir Statman in 2000) have attempted to translate human needs into economic needs such as security, possibility, and aspiration. have documented a theory known as SP/A.
In their book, Dr. Daniel Crosby and Dr. Chuck Widger write, “Security represents the most fundamental economic need, rooted in feelings of fear, like the bottom of Maslow’s hierarchy.” is written. personal benchmark. “If you can provide a security bucket and hold them accountable, they will be less fear-based and better able to make rational financial decisions.”
In the SP/A model, potential refers to our general desire for economic prosperity, while aspiration refers to our drive to achieve specific economic goals. “In contrast to the fear-based sentiments that underlie security, possibilities and aspirations are driven by hopeful prospects,” Crosbie and Widger suggest.
Hope is what we strive for in investing, but students of behavioral finance will remember that fear is about a two-to-one more powerful motivator. This may be where the financial industry particularly fails. In making a strong case for investors to make more money (when investing with advisor X or company Y) rather than dealing with the fear of loss from the get-go. It’s as if most investment professionals fixate on the “P” in her SP/A, paying little attention to the “A” and even less attention to the “S”.
So what does the equation, portfolio construction, look like if it is truly customer-centric and human-first?
In Investing in the Language of Life, I provided an investment framework that breaks down portfolio construction to ensure that at least four “buckets” are addressed, if not filled. While priorities may vary from investor to investor, here is a list designed to help you apply SP/A wisdom.
· protect – Protect your family, lifestyle, and property.
· live – Provides a predictable source of income to ensure current preparedness.
· growing up – Grow your assets for the future.
· give – Contribute to people and causes that are important to you.
Investing in the language of life
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Protected Buckets and Live Buckets are designed to address the security needs of investors in the near and short term. Once the fear factor is resolved, investors are free to pursue their potential more effectively in the “Grow” bucket and to pursue specific goals such as paying for their children’s education or creating a legacy in the “Give” bucket. You will be able to achieve your ambitious goals.
The real key to getting the most out of this framework is to intentionally and clearly satisfy each individual’s needs. In other words, you don’t have to have bucket conversations and throw everything into a 60/40 portfolio. In particular, to realize the benefits of Protect and Live buckets, it’s best to have unique investment mechanisms for each that connect the dots for your clients.
For example, I’m a big fan of stocks, but with very rare exceptions, stocks are crappy assets to put in your protection bucket. And this is where we, as advisors, need to consider assets and asset classes that may not be our personal favorites, but are perfectly appropriate to help our clients build a solid foundation for their investment plans. .
Yes, as true fiduciaries, we must represent our clients in their product set and even their specific investment philosophy. Optimal An optimized portfolio is not one that has been designed through some degree of backtesting to perform a certain way in any number of hypothetical scenarios in order to beat any market benchmark. No, the best portfolio is one that the client can continue to use as a personal benchmark.
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