More than 114 million people watched the Super Bowl end with a New England interception on their own goal line. The drama made Seattle's last-second first-half touchdown virtually forgotten. The play calls were similar, but both the stakes and outcomes were different. An interception at the end of the half would have been discouraging for the Seahawks, but not devastating. At the end of the game though, it was literally game over.
In financial planning, most of us can handle being discouraged, but game over is another story. Frankly, most financial planning decisions are not really high-stakes, regardless of how they feel at the time. Distinguishing which ones are and aren't will be the key to being comfortable. Here are a few to think about.
Diversification with investing may at times leave you discouraged, but it will also always keep you in the game. What is strange about this, though, is that generally, great wealth comes from undiversified risk. Bill Gates didn't become a billionaire selling Microsoft and buying mutual funds. Not diversifying may work to make money, but it is a horrible way to keep it. And for most people, it is not even a good way to make money. For every Apple success story there are many more failures like Atari; and Target makes us forget the Woolworths or the Montgomery Wards.
The past couple of years have been difficult for those who diversify. U.S. stocks have done much better than international stocks, and the headlines are all about the S&P's performance — unmatched by anyone who had an appropriately diversified portfolio. The problem now is that it is easy to turn halftime into game over. People tend to give up on diversification at the worst time (think 2000). Therefore they are two-time losers. They get compromised returns when diversification isn't doing as well as the headline category and they quit diversifying at the time when it works the best.
We recently had someone come into our office who was in their 70s and unhappy with the recent returns that their current adviser had created through diversification. But in reviewing their portfolio, the returns were basically what they should have been. One could argue with the amount in any one category, but the portfolio had a nice mix of large, small, U.S. and international stocks as well as bonds. By making a switch for the wrong reasons and potentially at the wrong time, they could be turning halftime into game over.
Establishing wills and trusts is another way to avoid game over. Many young adults have difficulties handling inheritances because their lives are somewhat unstable. They are in new jobs, new marriages and discovering what things are important to them. If money is suddenly dropped in their lap through an inheritance, it can often be overwhelming and lead to actions that are not in their best interests. While some cash may be liberating, it can also be penalizing. They may buy a home that they cannot afford to keep up, or they may waste it on something that gives them temporary pleasure at the expense of longer-term satisfaction.
Increasing your chances
Game over can be avoided in a variety of ways. First, by talking with your adult children openly about money, you can help them understand the influences it has had in your life. Second, you may arrange for them to get advice with regard to money basics. Third, you can create your will so that if you die, money does not go directly to them, but is held in a trust (naming your children as well as someone you know as trustees) to potentially protect those assets from bad marriages or bad businesses. While the kids may feel a bit discouraged by not getting the money outright, it offers them a host of protections that can still provide them some of the benefits of an inheritance without risking the lot on decisions made at times when they may not be in the best place to make them.
Game over is avoided when you increase your chances of success rather than attempt for maximum success. For example, high school seniors all over the state are receiving their acceptance and rejection letters for college. While a rejection letter is discouraging, it is not devastating. Much of the focus for these kids is getting into stretch schools rather than the schools that may be the best fit. Is it better to be one of the least qualified students at a stretch school or more competitive at a school in which you are better suited? As Malcolm Gladwell points out in his book "David and Goliath," if you want a career in the math and sciences, finishing in the top third of your class makes a difference. While you may be able to do this at the stretch school it may also, well, be a stretch. For some who are interested in a career in medicine, the stretch school may be game over.
You can also avoid game over with insurance by having better coverage with higher deductibles. While paying a higher deductible or not even being able to file a claim is discouraging, it's not devastating (I speak from experience since one of our daughters drove the car into our house, causing enough damage to make the check for repairs painful but not enough to file a claim).
You may not have 114 million people second-guessing your decision about your homeowner's insurance, but you can make sure it's not game over.
Ross Levin is the founding principal of Accredited Investors Inc. in Edina.