the simple things

Blueprint for retirement - save money, invest, have a bundle of money at age 65. This is a widely understood process. We know we need to put away some part of our paycheck and we know we need to invest those savings in some vehicle that grows. We're probably also aware of the next level of granularity around this process; things like asset allocation, diversification, etc. Even if not entirely understood, we've had this sort of information pounded into our heads over the years.

What's not clear is how much of this know-how has been converted to action. I know average savings are 0% of income right now. Not good. How about investing? Probably not good. I say this because I've just completed the utterly arduous process of consolidating assets (cash accounts, broker accounts, IRA accounts) into a single 'location' and setting up a process to have those assets administered professionally. I'm lucky in that this is done for me free of charge. Even with that incentive it's utterly painful. Without that help it would be worse. I'd need to spend a huge amount of time actually investigating specific processes to implement these ideas and then another huge amount of time implementing them. And to be honest what motivated me wasn't that it's the right thing to do. I did it because the alternative was more arduous. Basically my trades are tracked because of my job and I need signoff from a compliance committee for every trade. Every trade is therefore a headache of paperwork. Professional administration removes my need for signoff. Any way you cut it, the 'do-it-yourself' investing movement over the last decade has made sound money management easier but not easy.

Take just one aspect of management - asset allocation. What exactly is the right allocation? I've seen lots of pie charts outlining different strategies (often at odds with one another). First off, what exactly is the right set of asset classes to allocate against? There are a lot of dimensions - geographical, market cap, valuation/growth, volatility, bonds/stocks, etc. If I see an allocation that doesn't include geography, for example, does that mean I can invest 100% in U.S. assets? Add to this the fact that I had assets over a number of areas (even more before consolidating) - options, ESPP plans, real estate, 401Ks, etc. How do I make sure I'm including all these assets into my allocation decisions. More importantly how does real estate fit into all of this for the average person since a lot of wealth is tied up in that vehicle? How do I allocate against that asset?

And then when do I reallocate? I could reallocate every day since my percentages change daily. That will create a nightmare tax and trading cost situation. How about once per year? Surely there is some implementable right answer to this question. Lastly how important is allocation? In other words should I spend energy focusing on this or not given my time/energy constraints? What opportunity cost is represented by not allocating correctly?

I've learned a couple things through this process:

1. While most people are concerned about these decisions they have neither the time nor the energy to do most of these activities or do them correctly. I know I didn't until recently. Yea I had money saved and invested into securities but it wasn't allocated, there was too much cash lying around, and it wasn't diversified on any metric. It was only a new child, free financial advisory/trading services, and a compliance headache that caused me to get on it.
2. The energy and time spent on this overall process is probably not spent in the most efficient areas. If you trade stocks I'm sure more energy is spent on when/if to buy/sell Google than what is your true asset allocation at this moment. Do you spend more time looking at historical returns on your 401K options or just contributing a little bit to each fund, but ignoring rebalancing and understanding how your allocation pans out? I know I thought along those lines until now. Ultimately I think things like proper diversification, allocation and rebalancing, incorporating tax implications, and systematic investment of new cash assets is where the bulk of returns are gained versus picking that one killer stock that plays out once and a while or scoring the right set of 401K funds. Rebalancing after I did some back of the envelope calcuations seems like a huge and completely ignored aspect of money management for the individual investor.

As much as the 'do-it-yourself' movement has appealing overtones and as much as financial advisors are doing, in many cases, almost programatic activities, I think their value is that they actually do these simple things. They just happen to be expensive or unavailable to the average person.

I see our clients every once and a while. While many came into a large amount of cash due to external events, most aren't big cash generators from their jobs. They are just more systematic about saving money and investing it wisely. They are ruthless about it. Or at least ruthless about making us do some of these activities for them. While I think our firm has shown great stock picking ability, it's probably the account managers who manage client portfolios that add more value at the end of the day. Analysts provide headlines for marketing materials and account managers actually deliver value.

Now I just have to get moving on creating a will.