This is one of my favorite questions to ask a prospective client. In asking this question, I’m trying to identify their perspective on the stock market. Does this prospective client see it as an opportunity to build a better future? Or do they see the stock market as something that could destroy their financial future? However they respond, the question creates an opportunity to learn about their perspective as an investor.
In my experience, investors across the entire risk tolerance spectrum tend to approach the stock market from a common default perspective. The default perspective is to measure success (and failure) by account balances and expenses.
While this viewpoint is understandable, one of its unintended consequences is that it can create a roller coaster of emotions. When investors see their account balance fluctuate, their default perspective provides only one way to interpret the data. This emotional rollercoaster can become especially chaotic when people enter their retirement years. Another byproduct of the default perspective is that it keeps investors hunting for the cheapest funds. While expenses are an important factor, cost alone is not the best method for identifying high-quality, long-term investments.
The Portfolio Waterfall investment strategies aim to help clients shift their perspective, giving them an alternative to the default view. Success should not be measured merely by account balances and expense ratios. While these are both important, they are inadequate benchmarks for measuring progress.
To help a client move from the default perspective, I explain that the goal of Portfolio Waterfall investment models is not simply to outperform this index or that investment. With the Portfolio Waterfall models, we seek to invest at the intersection of three critical factors – highest performance, lowest risk, and highest cash flow. The point where these three metrics connect is the point where potential value is created. Increasing cash flow and performance with the least amount of necessary risk potentially helps clients meet their financial objectives and stay invested for the long run.
If we stop here, a client may still hold the default perspective. We must take it a step further.
The next step is to help them turn from viewing success only through the “account balance” lens to looking at it from a “share owner” perspective. This is a significant mindset change that has the potential to give nervous investors greater confidence in their financial plan. While the “account balance” perspective tends to only consider appreciation as the benchmark for progress, the “share owner” perspective looks at investments from a total return approach. Investors who understand the total return of their portfolio – appreciation, capital gains, dividends, and interest – will be able to appreciate the “share owner” perspective.
I often use the analogy that investing in mutual funds and ETF’s is like investing in rental houses. If, instead of mutual funds, an investor owns rental units, he is probably not worried about the month-to-month values of his properties, as determined by the real estate market. If the rent payments are coming in, the property is maintained, and the neighborhood remains in good shape, the owner is happy.
This analogy is helpful because shares of mutual funds and ETF’s are economic engines. These economic engines can produce cash flows that are similar to the rental income from a real estate portfolio. Of course, these cash flows are not called “rent money”; they are called capital gains, dividends, and interest. Investors who adopt a “share owner” perspective can focus on the cash flow and shares owned rather than just the fluctuating values dictated by the stock market.
Once a client starts to shift away from the “default perspective”, a new benchmark of gauging success is needed. With the Portfolio Waterfall strategies, our benchmark starts with a question for the client, “How many shares do you need to own to reach your objectives?” By having a “share owner” perspective, the client has a clear metric to see progress towards reaching their goals. No longer do they feel like they have lost progress when the market goes down. Instead, they see it as an opportunity to buy additional shares while they are “on sale!” This is not to say that don’t pay attention to the account balance. The account balance is still important, but with a “share owner” perspective, they realize the number of shares they own is potentially a more accurate measure of progress.
The good news for financial advisors is that our job is easier when our clients have a “share owner” perspective. Clients with this perspective will rarely call, emotionally distraught and ready to ditch the stock market. And this matters because one of the core functions of our job is to help clients stay invested long-term to reach their goals. Helping clients adopt a “share owner” perspective using the Portfolio Waterfall investment strategies has been the most effective way I’ve found to help clients stay invested through turbulent periods in the stock market. Another benefit of helping clients adopt the “share owner” perspective is that it empowers them with a sense of control. No longer do they feel like they are riding an emotional roller coaster. Instead, they can keep their eye on the number of shares needed to potentially reach their goals.
If you would like to see examples of the “share owner” perspective or would like help to implement this concept into your business, please contact me with the information below.
Josh Curtis
Managing Member
Gestalt Financial Group
(402) 436-2596
josh@gestaltfinancialgroup.com
