Delusional Diversification: The Flawed Logic of Using Multiple Advisors

“Put all your eggs in one basket…and watch that basket.”…Mark Twain

There’s a population of affluent investors who, in a vain effort to achieve portfolio diversification, hire multiple financial advisors to mitigate their portfolio risk. Not only is this effort wrong-headed and risky, but it may contribute to the exact condition these investors wish to avoid.

The research we’ve seen indicates that 70% of individuals with portfolios in excess of $1 million use an advisor, and 34% of this population employ multiple advisors. Anecdotal evidence is telling us that this number may also be increasing, as affluent investors attempt to counter the increasing volatility of market conditions.

The psychology of having multiple advisors would seem to be an extension of basic asset allocation principles. Investors reason that if allocating investments across a diverse portfolio is sound advice, why not extend this thinking in order to get a diversified array of “expert” investment opinions?

Unfortunately, there’s a fatal flaw in this logic.

This flaw can be illustrated by considering a hypothetical case study. Let’s consider an individual who is due to retire in one year. They are interested in developing an efficient income plan and tax strategy that takes all of their variables into account. Their assets consist of multiple IRA’s from past employers, a substantial 401(k) with their current employer, as well as a taxable account. Of course the location of each account is important in this calculation. IRA’s are tax-deferred and offer unlimited investment options. 401(k)s are also tax deferred but have more limited investment choice. Personal accounts are fully taxable and have virtually unlimited investment options. When one apportions an investment portfolio among the different asset classes, e.g. stocks, bonds, cash, real estate, alternatives, etc…there is a risk/reward trade-off between these various asset classes. Moreover, when one is retiring, another level of complexity is added because withdrawals may be taken into account. At this point, the investor must decide where and how much to hold in certain types of investments, as well as deciding what accounts should be sold and in what amounts such that the marginal tax bracket is minimized each year.

Given this scenario, it is nearly impossible to expect that a disparate group of advisors working at different firms could develop an efficient communication plan that avoid pitfalls like: portfolio overlap, security concentration, or a less-than-optimal asset allocation, or other equally serious risk factors. The fact is that most affluent investors lead complicated lives anyway. Investors who work with with multiple advisors add a layer of complexity that is, at best, troublesome and, at worst, needlessly perilous.

On top of all of this, post-financial crisis, affluent investors are quite clear on their new investment priorities. In the 2010 World Wealth Report:

• 79% of high-net-worth investors indicated that “greater transparency and simplicity around products, risks, fee structures, portfolio reporting, and performance” was important to extremely important.
• 81% of HNW investors were highly desirous of “scenario analysis on the proposed allocations/products aligning to individuals’ goals/expectations.”

So...affluent investors are telling us that they want simplicity, greater transparency, and a scenario analyis that aligns to their goals and expectations. However, if they have hired multiple advisors...this is unlikely to happen! Multiple advisors cannot assess risk properly because they hold only partial information and cannot estimate the outcome of their choices upon the entire portfolio. Financial decisions made without a broad-view perspective, are risky and can lead to asset overlap, higher tax brackets, and poor portfolio performance.

For financial advisors who have clients with multiple advisors, the good news is this. By virtue of having many advisors, the client is most likely saying that they want to reduce their portfolio risk. In which case, it is incumbent upon the advisor to show them a better way to accomplish this.

By the way, today, November 30th, is Mark Twain’s birthday. It is the irony of ironies that he has said, “Put all your eggs in one basket…and watch that basket.” Although Twain was a very successful author and speaker in his lifetime, he was a hapless, hopeless investor. He bankrupted himself by funding the Paige Compositor, a beautifully engineered typesetting machine that never came to market due to the perfectionist nature of its inventor. Over a 14-year period, from 1880-1894, Mark Twain invested $300,000 in this device (equal to $7.5 million in inflation-adjusted dollars), which was the bulk of his book profits plus a good portion of his wife’s inheritance. You can laugh and grin at Mark Twain’s most quotable quotes, but never follow his investment advice.

by Chris Holman

Your Thanksgiving Checklist

Celestine Chua is a native of Singapore and the founder of The School of Personal Excellence. She graduated from the National University of Singapore in 2006and secured a position with Procter & Gamble as an assistant brand manager. Two years later, she walked away from the financial security and prestige of P&G...towards her "real purpose", which is "helping people grow and living their best lives." She founded The School of Personal Excellence, which serves as a training ground for individuals who seek to live according to their passions in their personal or
professional lives.

She has compiled a list of 60 things to be grateful for in our lives. In the spirit of Thanksgiving, and as as aid to those of you who need some hints on this day, we offer you the following:

1. Your parents - For giving birth to you. Because if there is no them, there will not be you.
2. Your family – For being your closest kin in the world
3. Your friends – For being your companions in life
4. Sense of sight – For letting you see the colors of life
5. Sense of hearing - For letting you hear trickle of rain, the voices of your loved ones, and the harmonious chords of music
6. Sense of touch - For letting you feel the texture of your clothes, the breeze of the wind, the hands of your loved ones
7. Sense of smell – For letting you smell scented candles, perfumes, and beautiful flowers in your garden
8. Sense of taste – For letting you savor the sweetness of fruits, the saltiness of seawater, the sourness of pickles, the bitterness of bitter gourd, and the spiciness of chili
9. Your speech – For giving you the outlet to express yourself
10. Your heart – For pumping blood to all the parts of your body every second since you were born; for giving you the ability to feel
11. Your lungs – For letting you breathe so you can live
12. Your immune system – For fighting viruses that enter your body. For keeping you in the pink of your health so you can do the things you love.
13. Your hands – So you can type on your computer, flip the pages of books, and hold the hands of your loved ones
14. Your legs - For letting you walk, run, swim, play the sports you love, and curl up in the comfort of your seat
15. Your mind - For the ability to think, to store memories, and to create new solutions
16. Your good health – For enabling you to do what you want to do and for what you’re about to do in the future
17. Your school - For providing an environment conducive to learning and growing
18. Your teachers – For their dedication and for passing down knowledge to you
19. Tears – For helping you express your deepest emotions
20.Disappointment - So you know the things that matter to you most
21. Fears – So you know your opportunities for growth
22. Pain – For you to become a stronger person
23. Sadness – For you to appreciate the spectrum of human emotions
24. Happiness – For you to soak in the beauty of life
25. The Sun - For bringing in light and beauty to this world
26. Sunset – For a beautiful sight to end the day
27. Moon and Stars - For brightening up our night sky
28. Sunrise - For a beautiful sight to start the morning
29. Rain – For cooling you when it gets too warm and for making it comfy to sleep in on weekends
30. Snow – For making winter even more beautiful

31. Rainbows – For a beautiful sight to look forward to after rain
32. Oxygen - For making life possible
33. The earth – For creating the environment for life to begin
34. Mother Nature - For covering our world in beauty
35. Animals – For adding to the diversity of life
36. Internet - For connecting you and me despite the physical space between us
37. Transport - For making it easier to commute from one place to another
38. Mobile phones – For making it easy to stay in touch with others
39. Computers – For making our lives more effective and efficient
40. Technology – For making impossible things possible
41. Movies – For providing a source of entertainment
42. Books – For adding wisdom into your life
43. Blogs – For connecting you with other like-minded people
44. Shoes – For protecting your feet when you are out
45. Time – For a system to organize yourself and keep track of activities
46. Your job – For giving you a source of living and for being a medium where you can add value to the world
47. Music - For lifting your spirits when you’re down and for filling your life with more love
48. Your bed - For you to sleep comfortably in every night
49. Your home - For a place you can call home
50. Your soul mate – For being the one who understands everything you’re going through
51. Your best friends – For being there for you whenever you need them
52. Your enemies – For helping you uncover your blind spots so you can become a better person
53. Kind strangers – For brightening up your days when you least expect it
54. Your mistakes - For helping you to improve and become better
55. Heartbreaks - For helping you mature and become a better person
56. Laughter - For serenading your life with joy
57. Love - For letting you feel what it means to truly be alive
58. Life’s challenges - For helping you grow and become who you are
59. Life - For giving you the chance to experience all that you’re experiencing, and will be experiencing in time to come

60. You. For being who you are and touching the world with your presence.

Thank you to Celestine Chua for this list! Thank you to all of you for your support! Happy Thanksgiving to one and all!

by Ray Sclafani

Thanksgiving's Indomitable Founder: Sarah J. Hale

As we all give thanks this Thanksgiving, we might want to pause and thank Sarah J. Hale. Without her unrelenting 35-year long campaign, Thanksgiving would not be our national day of thanks.

By any measure and in any era, Sarah Hale was a remarkable woman. Sarah Josepha Buell married David Hale in 1813, and had five children with him. When he died suddenly in 1822, she was compelled to turn to writing to support herself and her family (One of her children’s verses was “Mary had a Little Lamb”). After the successful publication of a book of poetry as well as a novel, she was solicited to become the editor of a new magazine aimed at women, Ladies Magazine and Literary Gazette. In 1836, Louis Godey convinced Hale to become the editor of his magazine. Godey’s Lady’s Book. Godey’s Lady’s Book was one of the most influential magazines of the 19th century, reached a wide audience and covered topics ranging from health, beauty, cooking, gardening, and architecture. Hale published articles about proper writing techniques and prescribed reading lists, similar to ones given at college courses, to further educate her readers. Hale also published lists of schools that accepted women and advocated for women’s education. Over the years, Hale became more vocal in suggesting that, not only should women be educated, but they should receive a similar education to men.

35-Year Campaign
Beginning in 1828, Sarah Hale began writing editorials calling for the entire nation to observe a national holiday on Thanksgiving, similar to the holiday that she had experienced as a native New Englander. In between the editorials, Hale wrote hundreds of letters to politicians, including five presidents, lobbying for a day of thanks.

35 years later, in September 1863, less than three months following the Battle of Gettysburg, one of her letters reached Abraham Lincoln. It begins:

Sir:

Permit me, as Editress of the “Lady’s Book”, to request a few minutes of your precious time, while laying before you a subject of deep interest to myself and …as I trust…even to the President of our Republic, of some importance. This subject is to have the day of our annual Thanksgiving made a National and fixed Union Festival.”


Timing, and Persistence, is Everything
Finally, after years of pleas to deaf ears, Sarah Hale benefited from propitious timing. The fall of 1863 was a depressingly dark period in a nation splintered by an appalling civil war. The Battle of Gettysburg, with more than 50,000 Union and Confederate dead, lingered painfully in memory. The Battle of Chickamauga, fought in September, was one of the worst Union defeats of the War. President Lincoln was attuned to the mood of the nation, and was sensitive to the hundreds of thousands of soldiers away from home…as well as being keen to find ways to rally the nation’s spirit. Hale’s letter also benefited from some clever marketing on her part. She included two letters of support from governors who endorsed her effort, as well as a mention of her “good friend, Hon. Wm. H. Seward”…who happened to be Lincoln’s Secretary of State at the time.

On October 3, 1863, Abraham Lincoln issued the proclamation that declared the last Thursday in November to be Thanksgiving, a national holiday.

Hale followed up Lincoln’s proclamation with a final editorial poem to celebrate this day of national unity and thanks:

All the blessings of the fields,
All the stores the garden yields,
All the plenty summer pours,
Autumn’s rich, o’erflowing stores,
Peace, prosperity and health,
Private bliss and public wealth,
Knowledge with its gladdening streams,
Pure religions holier beams…Lord, for these our souls shall raise.
Grateful vows and solemn praise.

by Chris Holman

"That which does not kill us makes us stronger."

"That which does not kill us makes us stronger."...Fredrich Nietzsche

In 1993, J.K. Rowling and her six-month old daughter were living in Edinburgh, Scotland. Penniless, depressive and contemplating suicide, Rowling had separated from her husband and was living in a cramped apartment with her daughter, Jessica. While surviving on state welfare, Rowling would escape her flat in an effort to walk her daughter to sleep. She would often end up in cafes where she would complete her first novel. Today, her Harry Potter books have sold more than 400 million copies, and Rowling’s estimated net worth exceeds $1 billion.

Steve Jobs was adopted by a working-class family, and grew up in the apricot orchards that would later become Silicon Valley. In 1972, Jobs attended Reed College in Portland, OR… dropping out after one semester because the tuition was too much for him. He continued to audit classes at Reed, including a course in calligraphy. Says Jobs, “If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts.” In 1976, Jobs founded Apple computer with his buddy, Steve Wozniak. 8 years later, following an internal power struggle, Jobs was forced out of Apple by John Sculley. In 1986, Jobs bought Pixar from Lucasfilms for $10 million. 20 years later, he sold Pixar to Disney for $7.4 billion. Around the time that Jobs was booted from Apple, he founded NeXT Computer. In 1996, Apple purchased NeXT for $429 million, bringing Jobs back to the company he co-founded. In 1996, Apple was trading at around $12 per share. Since then, there have been two 2:1 splits, and AAPL now trades above $300 per share. Jobs’ stake in Apple and Disney exceed $6 billion.

Back to Fredrich Nietzsche’s quote, which has now become an adage used by annoying people who want to mollify us during stressful times. Turns out Nietzsche was right!

In a new study, “Whatever Does Not Kill Us: Cumulative Lifetime Adversity, Vulnerability and Resilience” the effect of adverse situations on people’s mental health and well-being is examined. In a longitudinal study occurring over many years, authors Mark Seery, Alison Holman, and Roxane Cohen Silver reveal that persons exposed in moderation to adversity over the course of their lives are higher-functioning and had generally a higher life satisfaction over time. Furthermore, people who had encountered adversity in their life were less negatively affected when they encountered adverse circumstances later.

In this study, authors Seery, Holman, and Silver report,

• Resilience involves having psychological and social resources that help people tolerate adversity, but coping with adversity may itself promote development of subsequent resilience.
  
• Experiencing moderate amounts of adversity creates effective coping skills, helps engage social support networks, creates a sense of mastery over past adversity, fosters belief in the ability to cope successfully in the future, and generates psycho-physiological toughness.
  
• All of these qualities contribute to resilience in the face of subsequent major adversity. Such qualities should also make subsequent minor hassles seem more manageable rather than overwhelming, leading to benefits for overall mental health and well-being.”

This study is interesting and important on several levels. The knowledge and confidence gained by being able to survive life’s challenges helps us to better navigate our way through future adversity through the development of subtle and supportive self-interventions.

Says Steve Jobs, “Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”

by Chris Holman

Veterans Day

“Without heroes we are all plain people, and we do not know how far we can go.”…Bernard Malamud

Today is Veterans Day. Veterans Day began as Armistice Day, and commemorates the armistice signed between the Allies of World War I and Germany for the cessation of hostilities on the Western Front…which took effect on “the eleventh hour of the eleventh day of the eleventh month” of 1918. The First World War was known as “the War to End All Wars” because it was the bloodiest war in history up to that point. After 4 years of horrific trench fighting, 9 million soldiers had died, and 21 million had been wounded.

In many parts of the world, a two-minute moment of silence is observed at 11:00 AM as a sign of respect and remembrance for the 20 million people who died in World War I.

Following World War II and the Korean War, at the urging of the American veterans' service organizations, the 83rd Congress struck out the word “Armistice” and inserted “Veterans.” President Dwight D. Eisenhower issued the first Veterans Day Proclamation on October 8th, 1954.

The Department of Veterans Affairs estimates that there are 22,795,000 veterans living today. Vietnam Vets account for the largest proportion at 7,569,000. About 2 million World War II veterans remain, although their numbers are dwindling…with approximately 1000 dying each day.

Frank Buckles, at 109, is the last surviving American veteran of World War I. Born on a farm in Missouri in February 1901, he saw his first automobile in 1905, and his first airplane at the Illinois State Fair in 1907. Buckles enlisted in the Army in 1917 at the age of 16, lying about his age. He was sent to England and spent much of the war as a driver, delivering dispatches and driving the occasional ambulance. After the armistice, Buckles escorted 650 German P.O.W.’s back to Germany. Seeing his young age, the prisoners “adopted” him, taught him German and gave him food from their Red Cross packages. When Buckles visited Germany in the 1930's, while working for a steamship company, it was difficult for him to reconcile his fond memories of the German P.O.W.'s with what he saw of life under the Third Reich.

In 1941, Buckles was running the Manila office of the American President Lines. Taken prisoner when the Japanese invaded the Philippines, he spent 39 months in prison camps. Although he developed beriberi caused by malnutrition, and his weight slipped dangerously below 100 lbs., Buckles led his fellow prisoners in a daily calisthenics class.

Today, Frank Buckles lives near Charles Town, West Virginia where he purchased a 330-acre farm in 1953. When Buckles passes away, he will be buried in Arlington National Cemetery, having received special approval from the White House in 2008 (with prompting and special intervention from H. Ross Perot). When asked about the secret to his long life, Buckles said, “When you start to die…don’t.”

In Memory of USMC Lance Cpl. John J. Mann Jr. (1985-2010)

by Chris Holman