Understanding my clients’ relationship with money and their assets is part of the discovery process they experience when we first meet. Asking the right questions and then actively listening to the replies offers a wealth of information on the objectives, motivations, and perception you hold true. Understanding how you define risk, wealth, and happiness are all crucial to crafting the best wealth strategy for you. Creating an atmosphere of comfort and confidence in which to do so is part of the wealth management experience I deliver.
Oftentimes, I am asked about my perspective on wealth. Whether as part of a plan to transition assets to the next generation, planning out one’s own retirement, or employing strategies to preserve capital, to name a few, the scenarios are limitless. However, the common denominator to all situations is the human element. Investor behavior, cognitive bias, background all come into the equation when working with clients through market drawdowns like we witnessed earlier this year. Staying invested, understanding the portfolio’s construction and positioning and where possible, subsequently deploying capital in active rebalancing were all proven essential in 2020 and will do so again in the next crisis.
Having read "The Psychology of Money" by Morgan Housel in one uninterrupted sitting was the best way to enjoy his book. A long-time blogger, partner at the Collaborative Fund and recovering investment banker, Morgan's book offers clear thinking and a fresh perspective on a subject as old as capitalism itself. Rarely does an author capture the essence of a topic as fiercely debated as money, but he manages to deliver a book that will be the standard for better understanding how we think when it comes to happiness, risk, uncertainty, freedom to name but a few important subjects.
Housel's book is filled with phrases that could form the basis of a chapter all their own, both because of their simplicity and their capacity to provoke thought. In particular, the use analogies in describing how ice ages came to be as a way to describe the power of compounding, a concept that we collectively struggle to grasp when it comes to growth, was illuminating. Through the use of stories pulled from recent history, Housel is as comfortable describing the fact that you can be wrong half the time and still make a fortune as he is in talking about building a "margin of risk" into your wealth plan, a plan which should accept change as the only true constant.
One of the chapters of the book that speaks loudly in my professional experience is the one on comparing investment strategies and that "few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviours of people playing different games than you are." Personal finance is, by definition, personal. Determining acceptance risk levels are entirely custom to the individual's situation, not that of their neighbors, co-workers and even family members. While difficult in today's social media society, maintaining this aspect of wealth management is important in every conversation.
It may seem as though pessimism is at an all-time high these days but in actual fact, according to Housel, we are hard-wired to protect ourselves and our wealth and it is meant to serve to protect us. It is part of the reason why losses are generally more remembered than gains, and why we seek to avoid losses at the cost of achieving a win. As Housel outlines in his book, it are victims of our own perception because progress happens too slowly to notice, but setbacks happen too quickly to ignore. Housel rightfully points out, "in investing you must identify the price of success - volatility and loss amid the long backdrop of growth - and be willing to pay for it." Understanding of where one can balance the pessimism with a healthy dose of optimism is often where we begin the wealth management strategy,
The tidbits of wisdom composed by Housel, 36, are timeless in their applicability, and because The Psychology of Money is written in plain, easy to understand language in an enveloping narrative style, investing the time in reading this book is one piece of free advice I am happy to share with you. Whether you have the opportunity to read it in one sitting or not, it serves as a powerful source of perspective. I will likely find myself citing passages and phrases from the book in client meetings and the ability to put into practice many of Morgan Housel’s explanations has made me better equipped for my future client conversations.