Most investors have a false idea of their most vital assets.
In a pop quiz, stocks, bonds, cash, and real estate dominate the list.
They’re missing 2/3 of the correct response.
Financial wealth is part of the equation, but two more components are far more critical as one ages.
Time and health vault to the head of the pack.
The Enterprising Investor makes this point crystal clear in his terrific blog post:
The Three Stages of Life
Life can be divided into three stages:
Stage 1: Youth
You have time and health, but not much money (unless you have a trust fund).
Stage 2: Mid-Life
You have money and health, but very little time — career and family consume most of it.
Stage 3: Old Age
You have time and money (hopefully), but your health begins to deteriorate.
But there’s a magical stage between Stage 2 and Stage 3 where you have all three: time, health, and money. Some people extend Stage 2 for too long, chasing promotions, accumulating wealth, and missing this precious window to live fully and intentionally.
As investors age, their priorities often become out of whack. They prioritize their growing stream of wealth and ignore their health. On top of this tragic mistake, many assume time is like the S&P 500 and will grow 8-10% annually over the decades.
Nothing could be further from the truth. Unlike your real-estate portfolio, bond interest, or capital markets appreciation, time and your health are heading in one trajectory – down.
We can’t reverse time or aging. Our best hope is to slow them down by using wealth to buy tickets to improve the quality of life.
This topic has come up frequently over the last few weeks, as the markets are in a perpetual state of manic turbulence. Clients have called us with their concerns, especially about their future spending plans.
Should I still take this special trip we’ve been planning for months?
Is it a good idea to purchase our dream house?
When will this chaos end?
Unfortunatley, I don’t have the answer to number three, but regarding the first two, my answer is unequivocally YES!
These clients own diversified portfolios with strategic and tactical strategies to offset some of the market volatility. Possessing high-quality bonds, cash, and international stock allocations makes the arduous journey through market mayhem much easier.
While this is vital to the long-term success of a well-crafted goals-based financial plan, it’s not the central reason we encourage our clients to live their lives despite the daily machinations of emotionally laden markets.
The big secret about the financial services industry is that being an investment advisor is more about behavioral rather than financial management.
When we speak to clients, we emphasize the three forms of wealth, prioritizing time and health.
I’m pretty certain the markets will recover at some point. I have no idea what’s in the cards concerning your health and time remaining on this planet. You have the wherewithal to fund these goals, and to make a bet on two variables that we have little control over, like passing time and sudden illness, isn’t the optimal way to spend your retirement.
Prioritizing the composition of real wealth is an excellent remedy for market yips. It works – most of the time.
My colleague Barry Ritholtz drives home the point regarding focusing on things under your control. Decades as an investor and trader on Wall Street have taught me that panics come and go. Drawdowns, corrections, and crashes are not the problem – your behavior in response to market turmoil is what causes long-term financial harm.
The only rational behavioral response to dwindling health and time is not to waste a precious second of it.
