By Alan Friedman
When I tell clients I treat their money as if it’s mine, I’m referring to the deep understanding of self, the care, the thought, the planning that goes into successful investing — and the best way of explaining that is by sharing how I invest my own money.
About a month ago a client sent me an email with a link to a podcast reviewing a new book called “How I invest My Money – Financial Experts reveal how they save, spend and Invest”. The podcast intrigued me and I bought the book. Twenty-five professional advisors bearing their souls. The hook for me was in the podcast when the author said that after over 20 years in the investment business, no one ever asked him that question. The one constant question when I talk with clients is always do you own this? It’s a one off but never the deep dive.
So after almost a month of thinking about it, here is my answer.
You’re probably wondering why it’s taken me so long. Well, it’s easy to just make a list, but with deep reflection comes deeper meaning. Anyone who has gone to my website and viewed the video on the home page has heard my story of how and why I decided that being a financial advisor was going to be my vocation and lifelong passion. The story I shared in that video is a sad one, of how I received poor advice and lost all my money. As it happens, it was my awakening, yet it’s taken all this time for me to understand why.
In fact, growing up, experiencing loss was a far too familiar occurrence. At a very young age my father died, then my two uncles, all before my 25th birthday. We were a close family, all partners in the family business. I watched and witnessed what it took to pick up the pieces and start over. The debts that needed to be paid off. The commitment in both time and family life to rebuild. And what I see in me – in the way I am —in my perspective of life and my deep commitment to those dear to me, is what behavioural psychologists call “loss aversion.”
But please know this. I don’t feel sorry about what happened. It was my first really important lesson. The events were out of my control. What I could control was how I dealt with these events. My mother showed me how to rise up. To her, adversity was just something to overcome.
And I suppose that’s why those who know me well can understand my perspective on risk and how and why I can easily deal with market volatility. Really, it is just a moment, even if to most it feels like a lifetime.
The original Friedman Group (1959)
So, the year is 1981 and, with my security registration in hand, I was ready to begin my career
Perfect timing with interest rates breaching 20%, inflation even higher and stock markets about to enter a -40% bear market. It just seemed like the usual adversity to me.
Yet my good fortune was that 1982 ended a 15-year equity bear market. The industry had been hollowed out and there were few if any private client investors. I was, in hindsight, in the perfect place at the perfect time. I was blessed with more good luck when I met two more seasoned advisors who mentored me. After my speculative introduction to investing, I was taught the merits of investing alongside and in a similar manner to Warren Buffett. As well, I learned that no advisor can do it alone. If our job is to be an advisor, we need to share the duties of investment management.
Stay with me I will elaborate.
My life always comes back full circle to my family.
Everything that I do is with them in mind and my early life experiences are my guidepost
Bottom line, I would not and will not let what happened to me happen to them. What happened to me has resulted in my being obsessed with financial security. Even with my few extravagant excesses I am a compulsive saver. It takes money to make money and this is within my control. So I started early and embraced the “Power of Compounding”. Compounding takes years of patient dedication. The seeds I planted in 1981 bear witness to the results possible for those who can wait and control their emotions.
As always, with family in mind, we own two properties. Our home in the city and a country property where we enjoy family time together. Many view their home as their largest single investment. I have a different view. These properties create security for my family. To me they are not investments. When purchased both had mortgages. In fact, my first home mortgage had a 10.5% interest rate. Times were much different then. I paid both off as soon as I could. Sure, the rate of return is higher when you have a mortgage, but our homes are untouchable. I would have it no other way. I know first hand what can go wrong.
My next investment in peace of mind was insurance.
The first serious financial plan I did was in the mid 1990’s. The risk-free rate of return at the time was 8% vs the 0.25% today and the plan predicted that I would have a very respectable net worth by my 65th birthday. The issue was, what would happen in the meantime.
Alan and his family
The plan highlighted the possible short comings and every solution led me to insurance—with a head-spinning variety of term and permanent insurance options. I chose permanent. Although it would cost more and force short term sacrifices, it offered me a forced savings plan that, once paid for, could never be taken away. Again, it was all about family first. My decision was based on my refusal to risk coming up short when it came to protecting them.
Now if you think I take these things to extremes I must share with you that when each of my three girls were born, I insured their lives. I had two motives.
If, even after all my planning, I managed to mess up, with 65 years of compounding the insurance would give them a cash value that would take care of their retirement needs; and secondly, if God forbid, they became uninsurable later in life when many contemplate insurance, I would have already taken care of that.
By now I figure you’re probably wondering when I’ll get around to the money, but everything’s important — and everything I’ve shared so far truly matters
Everything is inter connected. This I might point out, is a tremendous advantage for me. As my own advisor I see all the pieces of my puzzle. There is full disclosure, which is something for everyone to consider. I quarterback my destiny. We all hate investing all kinds of time on a jigsaw puzzle, only to end up finding one or two pieces missing.
With investing I started early. From the very beginning I maximized my registered retirement savings plan. When Tax free savings plans arrived on the scene I did the same thing. If it was possible to save tax using a family trust I did it. Same with charitable giving. These are all structures that help your assets grow.
As an advocate of compounding, I use two strategies.
The first is, I like to purchase investments that pay me while I wait. History shows that 50% of the markets’ long term return has come from the compounding of dividends. I am a believer.
Reverse compounding is taxation. So, I try to earn as much as I can in dividend and income from my registered accounts where I pay no tax.
In my investment account, I hold equity investments and, like Warren Buffett, I am comfortable if they are of a quality that means I can hold them forever. If I don’t sell, I don’t pay tax. And that is my second investing strategy.
I find the obsession with portfolio performance interesting especially because very few investors look at their after-tax returns. In fact, it’s the after-tax returns that really count. I, on the other hand, am watching!
Last but not least, I appreciate that the world is a very big place and humility is something every advisor must learn to do well. When I am out of my comfort zone, yet know I need to own exposure to a sector or region I have little or no knowledge or experience in, I have no problem paying someone who has the expertise I lack. Why wouldn’t I? No one knows everything about everything and this is in my best interest — and my family’s best interest.
Whether it is my individual security picks or those of outside managers, I know it’s my asset allocation choice that will determine my success. So, a great deal of my time is spent researching, talking with managers and analysts and making sure I know and understand what I own, which is what my clients own.
And then the same effort goes into monitoring my investments. Staying the course is an active decision just like buy or sell. But it’s one made much easier when you are an educated consumer. My asset allocation is heavily weighted to equities. I believe in the long term. Someone approaching retirement still may spend 25 to 30 years there.
That is a long time and it requires significant funding. Therefore, I own stocks. That said, the markets can be cruel. For this reason, I tend to hold about 20% of my portfolio in cash when I feel markets may be vulnerable. I sleep well doing this. It helps me with my emotions and I can avoid making irrational decisions.
In concluding, I want to return to the financial plan I did in the mid 1990’s and for disclosure sake have updated many times.
After the insurance planning my very next course of action, as you would expect from someone who thinks of risk in everything, was to get my estate plan and Wills in order. Your Will can be a game changer.
Yes, I worry about my family’s future. So I hired an estate law specialist, she easily guided me through the process and now I have peace of mind.
As for the plan, for years I thought that my expected net worth would never be obtainable. A mountain just too high to climb. Yet recently I added up the number and was pleasantly surprised at how close I am to achieving that 25-year-old prediction.
The answer to my investment success was and and still is a belief in the long term and the knowledge that for me, adversity can lead to prosperity for me and my family. Just never stop believing.
Going back and reviewing thirty-eight years of investing is a very big undertaking. So I am quite sure that there are some nuances I’ve probably missed and other stories I haven’t gotten to. But if I’ve managed to make you think about your own investment story, it’s served a purpose.
Please let me know.
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Alan Friedman is an Investment Advisor with CIBC Wood Gundy in Toronto. The views of Alan Friedman do not necessarily reflect those of CIBC World Markets Inc. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Regulatory Organization of Canada. If you are currently a CIBC Wood Gundy please contact your Investment Advisor. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.
Insurance services are available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are available through CIBC Wood Gundy Financial Services (Quebec) Inc.