Before we dig in to the discussion of investment motivations, let’s review a few asset class returns year-to-date (YTD) ending October 31^st (all in their local currencies).

 

If nothing else, the year-to-date changes above tell us that there has been a lot of shifting in asset markets in 2021.

It was the sheer amount of movement that encouraged me to write the previous weekly comment pondering why interest rates are still so low…and if maybe some change is blowing in the wind.

Feel free to write in questions if you have them. Your comments help me research new ideas for these comments.

Speaking of reader comments, the following was inspired by a reader’s question to me about a speculative stock investment…

What Motivates your Investment Choices?

Let me share the exchange the reader and I had below:

Reader: (XYZ high risk company name) is this an option for investment? Thoughts?

Nick: These are the stories the financial markets are craving for. Yes, they make for speculative investment choices that can reap large rewards. If you do buy some, keep it to a small size.

Reader reply: Would you buy it for yourself OR something similar but better?

Nick:

Good morning ____,

You ask an interesting question.

Would I buy it?

If I am trying to make money as a trader…No, it doesn’t interest me. The cycle appears to be too long and it needs to be “discovered.”

If I am buying as a true investor that believes in the concept…Yes.

And if the “discovery” happens, you will profit immensely.

Not sure if that blurs the lines for you or makes things clearer.

Reader: Thanks Nick for your thoughtful answer. It depends on your perspective and what motivates you!

For the record, this reader is in the business of coaching and helping people communicate more efficiently.

His reply referring to perspective and motivation is spot on. Let’s dive in and see if we can set out some ideas that will help us to know ourselves better as investors.

Money is a convenient medium used to facilitate mutually acceptable exchange for the goods and services we desire. Bartering is inefficient and inconvenient. Plunder made for a violent society.

Investment is centered around the concept of deploying excess money we may have beyond our budgetary requirements and discretionary purchases and earning a return on it. Investment is net savings set aside for future spending or long term wealth accumulation.

But these formal definitions of money as a medium is not where its power resides and has limited influence on our investment philosophy.

The novel American Gods by Neil Gaiman personifies money/wealth as a powerful god that is worshiped by the masses.

As with any god, your personal relationship to it is dependent upon your intensity of belief. For many, worship at the altar of wealth is all-consuming and requires great sacrifices of their time and mental capital.

Others care little for money and see it as a necessary part of getting by in the world. Still others see it as a way of keeping score in some colossal game. There are many relationships to be had with money and wealth.

There are people who have little and strive to get more. Some people have little and are content. The happiest people I see are those who have enough and are content. Too many people have enough and still want more. Ironically, some are drowning in wealth and it still isn’t enough. You see, it is not the amount of money that shapes our motivations...it is our perspectives and relationships with it.

Our personal relationship with money/wealth is often formed in our early days and then nurtured into a worldview that guides our investment philosophy.

Which leads me to my summary statement: Our investment perspective is cultivated out of our experiences in life relating to money and wealth. Our motivations are a function of these nurtured, cumulative views reinforced by how others relate to us and our wealth status.

Working as an investment advisor for the past 34 years has helped me understand, that to do my job well, I need to have an idea about how you perceive your wealth in terms of your personality.

Lots of times I think I understand your motivations, only to find out I really didn’t get it right. Equally as often, I see clients who perceive their motivations as one way, but their investment actions are not in alignment with their motivations.

Back to the client conversation above.

There is no such thing as a one-size-fits-all investment.

There are times in the financial market cycle that it SEEMS like there is, but over a full cycle, you must be the type of investor that fits your perspective and motivations.

I find the best way to define yourself as an investor is to ask yourself how you would feel if __________ happened:

1. If you doubled your portfolio value today, what would you differently in your life?
2. If you lost half your portfolio, would it impact how you live?
3. Would a rate of return of 5% year be adequate for you to live the next 25 years? Do you need a higher/lower rate of return to live?
4. How often do you think about your portfolio? What is the first thought that comes to mind when you think about it?

I’m sure you can think of some more questions to ask yourself.

The reality is that Fear Of Missing Out (FOMO), There Is No Alternative (TINA), Keeping Up With the Jones’s and a bunch more psychological traps bombard us every day.

The social/media company we keep feeds into thinking and has a huge influence upon our perspectives and motivations.

For example, did you know the average American retail investor now has nearly a 90% equity exposure in their portfolio? (That number is so high because so many investors now use borrowed money in markets).

I have no hard data on what that figure was in other eras of investing, but I imagine the 90% level is near the highest in history.

Financial plans encourage us to look at our own goals and dreams and manage our wealth in harmony with those yardsticks. Our plan helps us avoid FOMO, TINA and many other investment landmines.

Perspective and motivation analysis can and should be done by each of us when we consider our financial plan relative to our portfolio structure.

Three Things that Fix This

One reader sent back a comment asking me what would you do if you could make the decisions for the financial world to deal with rising inflation?

Fair question and if I am going to throw stones at our financial leaders, I guess I should have a plan that I would expect to make a difference.

1. Raise interest rates at a steady pace to meet the present level of inflation – the cost of capital is too cheap and excess liquidity needs to be mopped up. A steady increase of 0.15% per quarter for 2 years would accomplish a lot. Especially if you told the financial markets you were going to do and stuck to your word.
2. Encourage private investment to produce more goods and services presently in demand on a national/local basis – More of the things we require need to be created. By increasing interest rates, demand will eventually moderate, but every county needs to spend less time “financializing its GDP” and more time creating real goods and services.
3. Stop sending out money to banks and people – some measured pace to stopping would be required, but free money needs to end.

Obviously, these steps would be painful for some sectors and help others. I get that…

Rebalancing causes new winners and losers. But rebalancing is what is required. Feel free to comment back about what you think about that type of plan or with your own thoughts.