Emotional Mistakes & Your Investments
From time to time, we run into a person with strong ties to an asset. Sometimes it is strictly a performance-based matter. Maybe it was an oil well or a stock producing strong returns for decades. Other times, the tie is highly sentimental.
Fondly remembering childhood memories is fine. However, be honest as to why you have such a tie to an asset. If the goal is to maximize rate of return, be rational and objective.
This is an important discussion as we often see people develop sentimental ties to assets that become a very large, if not irrational, part of their portfolio.
Consider the house you raised your family in. You have wonderful thoughts of a growing family. Those are fine memories, but it does not make it a good investment.
A house is large, illiquid and has negative cash flow. Each day of ownership accrues a bill for insurance, maintenance, property tax and often a mortgage. As you age, you are less able to do maintenance around the house. However, the house is now older requiring increased maintenance. As such, the costs continue to mount at a time when the cash flow and liquidity could be better utilized to support your retirement.
Similarly, if you own an asset such as a house or ranch with deep sentimental value, do not leave it to your heirs expecting them to keep it forever. Inheriting an asset can transfer a significant burden. Heirs may not have the same affection for the asset and may not have the money needed to maintain it.
Additionally, while the kids are growing the family compound has one set of goals. However, in time, the kids move to the four corners of the earth. One lives close by and uses the property on a regular basis, but they are saddled with the maintenance issues. The others who live far away couldn’t care less about the asset. A five hour drive each way completely defeats the purpose and enjoyment.
As such, consider selling your house and renting. In lieu of a family compound, go rent a place for a week. You’ll unlock liquidity, increase flexibility and let someone else have the “pleasure” of maintaining that asset.
Similarly, understand that no stock loves you. Stocks have no idea you do or don’t own them. And yet, we see people have an irrational attachment to a variety of ticker symbols.
Maybe dad worked for the phone company for 40 years and funded a sizable inheritance. Although this may offer financial flexibility, it doesn’t mean that holding this asset is a wise decision. Whether Exxon, AT&T or
Ford, all these business models, and associated profitability, are considerably different today than 50 years ago. Most likely, their best days are in the past.
It is also quite conceivable that a company provided a nice pay package and a fulfilling career. That does not mean it is a good investment. We know many people that worked for an energy company, an airline, the phone company or an auto manufacturer that earned wonderful salaries and extensive benefits. However, they are terrible stocks to own.
As such, sentimental investments may no longer be ideal for accomplishing your goals. As such, focus on the future ability of any asset to create wealth considering your unique goals.
Many potential clients tell us, “I’m conservative.” In assessing their conservative nature they have 50% of their assets tied up in an illiquid house they struggle to afford and another 30% in one legacy stock position.
Rarely do they understand the risk associated with having that much money concentrated in one stock position. This is even riskier given that the companies most productive days may history.
Understanding these psychological biases, be as logical and analytical as you can about maximizing the return on your assets.
Don’t fall in love with your assets. Your assets are there to serve you. However, they have no idea who you are.
Take pictures and videos of your family. Keep a family journal. Those are much less expensive to keep and maintain, and probably much more meaningful in the long-run.
Be sentimental about your family and friends, but don’t allow sentiment to cloud your judgement when it comes to your assets.
Dave Sather is a Certified Financial Planner™ and owner of Sather Financial Group. His column, Money Matters, publishes every other week.