Gaining Little, Losing Much: Financial Advisors' Daily Digest

By SA Gil Weinreich :

Want a worry-free retirement? Get on a path toward improving your financial standing, save and invest, and you will get there. We discussed the achievement of long-term financial viability in yesterday's post, and I did not intend to revisit the topic, but for a new post on today's SA which provided an irresistible counter-example.

In an article expressing concern that many financial advisors do a poor job managing portfolios - the new fiduciary rules notwithstanding -- Kendall J. Anderson, CFA, a veteran financial advisor, cites a 1979 Forbes article detailing the botched job performed by advisors serving as trustees of a widow's estate.

In a nutshell, a wealthy New York businessman left a large life income for his widow with the remaining capital to be divided by their three sons after her death. The family owned two large homes, one in Greenwich, Conn., and the other on Cape Cod. The kids "liked" both residences, so the widow kept both, living at the limit of her resources. You can already see where this is going. The following excerpt relays the question her financial advisors faced:

How could she maintain the houses and keep up roughly the same standard of living as before, with her husband's considerable salary no longer available? Each year it was decided to sell some growth stocks with low yields and move into bonds or high-yielding equities to maintain the needed income, and hope that all would end well.

Folks, a financial hope is very different from a financial plan. As you would expect, the widow rapidly dissipated her wealth and after 10 years was forced to sell both homes, moving into a smaller one less commodious to her children and grandchildren. Remember, the article was published in 1979, so those growth stocks that were sold for bonds wound up ravaged by inflation during much of that period.

It would be worth your while to read the whole story , together with Kendall Anderson's commentary. But here are my two cents: We don't know how this story ends; the Forbes author indicated the woman had many years of life still ahead of her when forced to sell her two homes. That being the case, it is entirely plausible that there was no inheritance for her children and that, indeed, she ended up a burden on her family. That is certainly the direction in which she was going by trading that which gains in value over time (stocks) for current consumption (a second home) and that which can grow in value (stocks) for that which depreciates in value (bonds).

Investors, here is a plan: Invest in your human capital by developing the skills and knowledge to earn a livelihood; save and buy a home that you can live out your days in; invest in businesses that can grow in value; and maintain liquidity in sufficient quantity to absorb the inevitable financial shocks along the way. Don't trade what is enduring for that which is ephemeral. For example, give up your cash to buy a home or stocks - your work skills will enable you to earn more income. But don't go in the other direction, selling stocks for bonds. You want a decent amount of liquidity, but you want to build up, not tear down, your nest egg. Lastly, you don't need two residences.

Please share your thoughts in our comments section. And here are today's advisor-related links:

See also The Bond Market Remains The Elephant In The Room on

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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