Wealth is a precious asset that must be closely and carefully guarded—especially if you are near or in retirement. Your number one priority must be to avoid significant losses, and then to focus on getting a reasonable return on your investments.
This may seem like common sense, but this philosophy is in stark contrast to the approach championed by the financial services industry. Their priority is growth because they believe that if you stay invested long enough, you will come out ahead.
Of course they don’t quantify ‘long enough’ so what they really mean is ‘hang in there for however long it takes for your account to recover from the devastating loss that wasn’t supposed to happen.’
That doesn’t make any sense to me. And that’s why I’ve spent years putting processes and strategies in place that are designed to prevent significant losses from occurring in the first place. Following this approach, my clients can sleep better at night and shouldn’t have to wait multiple years to recover from a downturn.
The Parable of The Sower
This brings me to the importance of maintaining your seed stock. This investing concept is based on the Parable of the Sower in the Bible. It can be found in Mathew chapter 13 verses 3 through 9:
“3 Then He spoke many things to them in parables, saying: “Behold, a sower went out to sow. 4 And as he sowed, some seed fell by the wayside; and the birds came and devoured them. 5 Some fell on stony places, where they did not have much earth; they immediately sprang up because they had no depth of earth. 6But when the sun was up they were scorched, and because they had no root they withered away. 7 And some fell among thorns, and the thorns sprang up and choked them. 8 But others fell on good ground and yielded a crop, some a hundredfold, some sixty, some thirty. 9 He who has ears to hear, let him hear.”
So, basically, this parable explains that there are 4 different types of ‘ground’ on which the farmer’s seed was sown. There was the wayside, stony places, thorny places and good ground. (I understand that this parable wasn’t necessarily referring to investing…)
I believe that this parable contains some very wise investment advice. Think about it this way: you have a finite amount of seed (money) and you need to get a return on that money. In the parable, the farmer scattered his precious seed everywhere.
That is the approach taken by the financial services industry. They typically advocate a broadly diversified portfolio that includes a little of everything out there.
They know that certain parts of the portfolio won’t do well while others will hopefully do well enough to make up for what the other parts lost. They rely on ‘diversification’ as the primary protection in this type of portfolio.
Of course, millions of retired investors paid a horrific price in 2000 and 2008 to learn that diversification alone doesn’t provide much protection in a market crash!
I Take a Different Approach
Instead of being a farmer that just scatters his precious seed all over, I would prefer to take the time to investigate my fields before planting my seed to try and identify those areas that are rocky, full of weeds that will choke out any growth; or on a path or road where there isn’t any soil. If there isn’t the reasonable probability of a healthy return in those areas, then I don’t scatter my seed there. Instead, I will focus planting my seed on the ground that is most likely to produce the best return.
This is one aspect of the risk management process that I apply to the accounts I manage. By narrowing the scope of where we plant it increases our potential for harvest. Moreover, it allows us to take the seed that otherwise would have been sown on the bad soil and either keep it safe in the barn or we can add it to the good soil. The seed kept in the barn isn’t affected by storms, wind and rain like the planted seed is. Having that seed in the barn reduces the overall volatility of the portfolio.
My practice focuses on managing money specifically for those that are retired or nearing retirement who recognize the absolute necessity of first protecting what they’ve worked so long and hard to accumulate and, secondly, to pursue prudent profits..