Episode 11: The Coffeehouse Investor Story
Today’s episode focuses on Bill and the Coffeehouse Investor journey. In the early 90s, Bill stepped away from his work at Smith Barney. He perceived an enormous opportunity evolving within the investment industry, including how individuals access financial advice and integrate it into their portfolios and lives. Bill processed this huge shift from defined benefit plans to defined contributions plans and submitted his book proposal for the original Coffeehouse Investor.
For Bill, his interest was peaked by his brother’s experience. During his time working for Alaska Airlines, Bill’s brother was switched from a defined benefit, or pension, to an individual account (e.g., 401k). Prior to the 1980s, if you worked for any major corporation, they offered you a pension. Based on the length of service and other factors, you then received a check during retirement for the rest of your life.
With a 401k, companies shifted the responsiblity of your retirement to you. Now, you’re charged with managing your investments. This shift has evolved to encompass most major companies.
We’ve shifted from social structures that take care of long term—-life-long employment with the same company, living in the same house for 30 years—-to expecting the individual to figure out all the pieces. We’re just starting to realize that the shift happened when we didn’t have the information we needed to make those important decisions. Since it happened during the 1980s and 1990s when the stock market was skyrocketing, we missed some of the underlying issues with 401ks.
Managing the Shift and Investor Behavior
How are we going to provide the right investments and tools for people like Bill’s brother to build a successful portfolio through their retirement years? Through both the Coffeehouse Investor and Behavior Gap, we’re looking to introduce behaviors that increase the chances of investors achieving their goals.
There’s tension between the need to pick the right investment strategy and how it can lead to the problem of behaving poorly. Coffeehouse Investor is about balancing the tension between these two things by encouraging you to focus on two things:
1. Developing a financial plan
2. Managing your asset allocation
Focusing on these principles can help put your behavior in perspective. If you have a plan in place, your behavior will encourage you to buy and sell at the best times, based on the market’s current performance.
Carl’s recent work on modern portfolio theory (MPT) has uncovered a discrepancy in recent articles proclaiming MPT dead. These stories overlook that MPT was meant to be a model, and models do not always capture reality. Russ Thornton of Thornton Wealth Management called MPT a theory accepted as scientific fact and elevated to a religion.
We can’t place too much weight in the idea that anything—-pensions, MPT, buy and hold—-is absolutely going to work. Financial planning and investing is about course correcting and realizing we need to reflect on what’s important and our values. Then, we need to take the best information we can, make a plan, and course correct. Really, the important piece is understanding that this is a cosntant process. It’s not a product or the search for Shangri-La. It’s about how you live your life versus the investment newsletter you subscribe to.
One Size Doesn’t Fit All
Over the last 25 years, if you didn’t like the stock market, you could put money in fixed-income investments. But even those who desire security now see CDs paying only 2-3% and may need to re-evaluate. However, even with interest rates so low, the right answer MAY still be putting your money in CDs, but you may need to make adjustments somewhere else. This industry has overlooked that it’s not right or wrong to put all your money in CDs, stocks, or somewhere in between.
Coffeehouse Investor puts into perspective that there’s no free lunch. You have to choose. Many articles are appearing, including Jason Zweig’s article about bonds historically performing as well as equities. Now, people are jumping on the recency bandwagon, because rates on fixed income are so low, equities are positioned to outperform fixed income options during the next decade.
You have to embrace a philosophy and re-evaluate on a consistent basis related to what’s happening in your life and in the world of investments. You may decide you can’t deal with the risk. Part of the job of a good financial adivsor is to help you understand the trade off. Your advisor should be able to say, “Everything I know about you tells me it’s ok for you to earn 4% for the rest of your life. If it’s not ok, then you can say, as a consequence, here’s what you’ll face in 10 years.”
Advisors need to be client zealots instead of fixed equity, hedge fund, or insurance zealots. This is the beginning of a new chapter of the Coffeehouse Investor and Behavior Gap. More people than ever before can benefit from common sense advice, from working with people who are client zealots and recognize different thresholds for risk and reward.
There are advisors who do get it (e.g., Secret Society of Real Financial Planners). Our goal is to help people figure out what is best for them. If you can, share this message with people. We want to spread the positive impact of what we discuss here and on our original websites.
Bill shared the story of a recent email he received from Ray. At 82, Ray wants to buy four copies of the Coffeehouse Investor book to share with his sons to ensure that the principles pass from one generation to the next and are applied to the family trust.
Ray isn’t the only one. At breakfast the other morning, Carl overheard conversations on either side of him about money and the anxiety about making decisions. The important message with Coffeehouse Investor and Behavior Gap is that we don’t have a specific philsophy for people to embrace. We want people to think about some of these issues. Some become easier, some become more complex (e.g., the personal stuff).
If our message is of value to you, please share our message. We suspect that you’ve got 97.5 friends that would find this valuable, too, if you do.
Links from Today’ Show
“A Good Time to Remember the Fundamentals”—-New York Times, 7.12.09
“Does Stock-Market Data Really Go Back 200 Years?“—-Wall Street Journal, 7.11.09
“Employees name investment adviser in 401(k) suit”—-Investment News, 7.19.09
