Trusts: The Right Scenario

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Trusts: The Right Scenario

Uncategorised Author: Admin


Could it be that some of the traits that help people become wildly successful are the same ones that cause difficulty later on?. I have observed successful business people focus their efforts and talents relentlessly in one direction and rarely look back for fear of losing their lead. When they fail they pick themselves up, evaluate how and why they went astray, and try again.

These people have learned to first concentrate relatively few available resources on a project and than leverage them like a breeder reactor. “Concentrate”? is a keyword here. Discovering and fully using freely available resources in a way that large competitors have not, doing one or two things really well, adding one innovation to a widely used system, perfecting a single strategy faster and better than anyone else, all are examples of their ability to focus resources and do the “one best thing”? with what little they have.

Ask them how they became successful, and they will usually be able to answer in several short sentences. They “happened” on the right formula, approach, strategy, and product; that is, they happened to do the “one best thing”? with what little they started with.

Odd as it may seem, this writer has noticed that when it comes to family financial planning, these otherwise successful people frequently find themselves at an impasse.

The paradox is that the best financial planning often requires the obverse approach of what helped these same individuals achieve success.

Rather than a single strategy or approach, the best financial plans are usually multifaceted constructs aimed at avoiding risk, maximizing return, minimizing taxes, and securing loved ones. Each component of such a plan complements the others and creates redundancies insuring against failure. They are not “one best thing” affairs.

What one hands down as a result of his life’s work is going to be measured by how well he does many good things with money during this period. There is a transition here: making money doing the one (or two) best things in business, keeping it doing the numerous right things as an investor and family leader. The transition from an executive, business owner, entrepreneur, to investor and family financial planner, involves some serious brain rewiring.

Absent the rewiring, the most common solution has always been to do generally one thing with one’s money, and the one that is generally considered the safest thing. The most common approach is to buy risk-free short-term treasury bills or triple-A short-term municipal bonds. This is a comfortable way to deal with perceived risk, and, of course, it parallels the “one best thing”? syndrome. But any “one thing”? strategy introduces un-noticed risks into a portfolio and one, for example, is inflation risk. What if our national currency loses value in the world market and/or we have a sudden and ongoing bout of inflation?

Another common solution is to do something “familiar” with one’s money, or just leave it alone in it’s already familiar place. That is, if in the hustle and bustle of running one’s business one just had enough time to stash money in a safe place like a CD at the local bank, why not just leave it there and even buy more CDs. This “one thing” strategy introduces an enormous risk to self and loved ones, called “opportunity cost risk.”? As an example of opportunity cost, compound out the loss of 300 basis points (3%) (the approximate difference between a “risk-free yield”? today of 5%, with 8%, reasonable expectation of long term return in a diversified portfolio) on a $1,000,000 investment over 40 years.

[The difference is $7,086,000 vs $21,663,000! The “one thing” safe investment created a loss to self and family of $14,577,000!]

Whatever “one-thing” investment strategy one adapts, with no exceptions, has a fatal flaw lying in wait. Any one investment strategy involving acquiring the one best asset/investment cannot survive every scenario that can emerge in our ever more rapidly changing eco-political universe. Again even the “safest”? investments guarantee the lowest return and therefore the highest exposure to at least two sorts of risk; the loss of future purchasing power and the “payment”? of enormous opportunity costs.

But of all the drawbacks of “one-best-thing” thinking there is one that renders even the smartest people paralyzed with doubt. Looking for the “one-best-thing”? (which as a fiction can’t exist) makes one think a really long time to decide on a course of action. Since look as one might, it can’t be found, the impulse is not to act.

Not only is inaction the result, but the Decision-making process for really important family matters becomes fraught with anxiety.

This observer believes that this is one of the primary causes for procrastination in doing whatever is truly in one’s overall best interest.

For an investing solution to counteract one’s own tendency to fall into this trap, It may be helpful to think in terms of portfolio construction rather than think about acquiring investment assets piecemeal. One might think of investment asset groups where it isn’t possible in one’s imagination to envision a scenario where all group members all go bust simultaneously while he, or his family, physically survives the scenario.

Using this powerful concept (which I call scenario diversification) makes portfolio construction engaging.

While one can’t protect one’s entire investment portfolio from every conceivable scenario, obviously, not all scenarios can emerge at once. Many are actually mutually exclusive. While one can always imagine a scenario that will “wipe out”? some investments, one doesn’t want to be able to imagine a single scenario that will wipe out all, or most, or a substantial part, of one’s portfolio. If you can indeed imagine such a scenario, than you you must make changes in your portfolio as soon as possible.

Scenario diversification is easy to adapt- we were all blessed at birth with sufficient imagination to adapt this powerful diversification strategy.

By the way, If one can imagine a scenario in which the world truly ends, it doesn’t count in this exercise because losing all our money wouldn’t matter.

Modern portfolio theory is another good starting point. In simple terms, the major theme, asset allocation, involves finding investments that are inversely correlated, that is assets that don’t all go down (or up) at the same time, and that each have historical growth rates which beat inflation and taxes. Notice that these two concepts (asset allocation and scenario diversification) totally avoid the “one best thing”? trap.

Its helpful to think in terms of multiple financial planning strategies and redundancy. When one investigates an investment for example, one might subject it an over riding primary single question: How does this investment complement my portfolio?

The “one best thing” approach might subject it to a single criteria test like: “what is the best investment if I don’t want to lose any money?” The problem is : If one constructed most of one’s portfolio with this single criteria and then used this same criteria to decide on future investments, at the end of the day one would have an undiversified (read: vulnerable) and low yielding portfolio indeed. Little chance here of beating inflation and taxes, of making a big inter-generational impact, of having an ample retirement cushion.

While one does his due diligence, he should keep in mind that the primary question is not about if he is “comfortable” with an investment because one will tend to be only comfortable with the familiar assets that one already has too much of, and his risk grows that these similar investments might all respond in a like manner to any one adverse scenario.

One might think about doing the right things instead of the one best thing. Surely the skills that one acquired as the business owner, entrepreneur, high paid executive, will really help one do his financial planning, but it is really essential to be fully aware of old emotional baggage that may overshadow rational thought.

Because estate planning differs from investing in that it seems remote and esoteric, a useful approach is to think of it as a multifaceted task in which desired outcomes are being created. The goal is essentially the same as investing. And as such, the thinking process is parallel. Good investing keeps and grows money as good estate planning does the same, but results are measured inter-generationally. On envisioning an estate outcome one truly desires it is important to realize that the results one seeks might need to be created with sophisticated (and even arcane) legal technology.

Surely there is no one perfect estate plan for everyone alike, nor can there be one thing we do that defines and insures all our investment goals. Increasing security for loved ones, increasing inheritable assets, reducing taxes, and avoiding inheritor conflicts and troubles is, however, a goal that may inspire one to accept some initial complexity in one’s planning. It’s a goal that can’t be reached by procrastination and maintaining the status quo.

We need to start looking for right things to do as early as possible. Check out our web site for some ideas of what other people are doing now!

We need to keep doing the right things instead of looking for the one-best killer thing that dispenses with the whole problem.

It doesn’t exist.