Stewardship in Rocky Seas
Monthly ColumnBy Daniel A. Barnes
Sometimes I don’t like the term Financial Advisor. It’s seems as though there are about half million financial advisors, and they’re not a cut from the same cloth. But at the end of the day, they do pretty much all have the same mandate: To protect the hard-won accumulation of people’s net wealth. And protection is all about stewardship, the concept of responsibility to care for something owned by someone else.
As an Advisor to clients’ accumulated saving, I understand my mandate as steward of that savings. And, I don’t like risky assets today. We are at the crossroads of change, and in times like these there are often great successes – but also great failures. We want to focus more on investments where we are confident that we will receive our principal back. We want to focus less on investments where the principal is at a greater risk.
That means we want portfolios to be less weighted with investments in which we own assets with operation and risks, specifically stocks and real estate. Great fortunes are made by the founders of innovative companies that create value in the midst of times of big change.
Companies like that include Microsoft in the computer maelstrom of the 1980s, Cisco in networking in the 1990s, and Google in search and advertising this decade. But great fortunes are accompanied by great losses, and there are plenty of other companies that suffered significant losses. As minority shareholders, we are not founders, and hence, we care more about the return of our money than the return on our money. That’s why we are so happy now. Risk assets continue to be priced at what we think is full value.
Be Happy
For those heavily weighted in risk assets like stocks, now’s your chance. If your time frame is less than 7 years, don’t worry too much about the future, be happy you’ve been given a chance now to reduce your risk exposure, and sell ownership assets at reasonable prices.
We don’t know exactly which direction the winds of this alleged recovery will blow. A rapid recovery has been anticipated, but we’re skeptical. A wet blanket recovery is also very possible.
In either case, the assets that we think will not perform as well are the assets that represent ownership, and stocks are included in that category. We call these “risk” assets and we suspect that many people own more of them than is healthy for their financial well being and the prudent stewardship of their accumulated savings.
Real Estate and General Volatility
Markets are difficult. Sometimes ownership interests are priced too cheaply, and sometimes they are price too expensively, relative to debt instruments and other investments such as real assets (commodities). That’s why there is market volatility. It is also why this period of time is so difficult; it is at present not clear whether the values of existing assets are too high or too low.
Real Estate also represents ownership. While Real Estate tends to carry with it less operational risk, it still entails a lot of risk. Real Estate also goes in twenty-year cycles, one decade good, the next decade bad. We are in year five of the bad decade, so we are not optimistic about real estate values today.
In Conclusion
Today as steward of our client’s finances, we don’t like risk assets in this market.
Great fortunes can be lost in periods of heightened creative destruction. We don’t know who the next Google will be and finding the next Google isn’t my mandate, stewarding client wealth is. Earlier this year, most participants agreed that risk assets were too cheap, particularly stocks. So on this basis; the stock market rallied 50% from its darkest days in March 2009. But we recognize that risk assets are particularly risky right now, and we’d generally prefer to be a lender instead of an owner, while we wait for the dust to clear.
If you are unsure whether your portfolio has too much risk in it, give us a call and ask about our “Second-Look Service.”