While the S&P 500 remained near its all-time high, the recent massive selloff in the technology sector went mostly unnoticed. But for investors who follow the so-called “FANG” stocks (Facebook, Amazon, Netflix, Google) the hit was painful: About $60 billion in value was wiped out in just one afternoon, representing the largest selloff in nearly 2 years.
The wipeout was a function of just how big these companies have become and the position they are in with new tax reform looming. Tech companies are expected to receive little benefit given its already-low average tax rate of 18.5% (below the 20% proposed rate).
This has caused investors to rotate out of the tech stocks and into the financial services sector, which stands to benefit more from a corporate tax rate that would drop from the current 35% to 20%.
Interestingly, the S&P 500 was relatively unaffected while this rotation into financials and out of tech ensued. The index’s volatility actually remained low, as did correlations among the S&P 500’s member stocks.
In other words, the diversity offered by the S&P 500 Index allowed for the index too remain relatively unscathed by the trading within the tech and financial sectors, a key reminder to investors that having proper exposure across the markets continues to be important with the S&P 500 near its all-time high.
What Are Your Own Possibilities?
Sometimes, the pursuit of wealth can leave a void in our lives—a place left empty because we lacked the energy or time to pursue a dream. There is a saying: “Wealth is not an end, it is a means to an end.” The problem is that the complexity of creating wealth and the subsequent financial planning often gets in the way of seeing and pursuing an end truly aligned with your highest purpose in life.
My life’s work has been focused on this critical unmet need. I hope to help people see the possibilities that open up once you escape from the chaos and confusion that characterize so much of the wealth management field today. I absolutely know it is possible to put a large portion of wealth management on automatic; I have built the system, structure, support and discipline to achieve this; and I’ve seen how using these benefits helps people define and achieve their highest ambitions. This approach is both effective and rewarding.
Clients are surprised sometimes when I ask them about their higher purpose and possibilities. It is not that they feel I’m prying; they just don’t expect an advisor to be concerned with such matters. I tell them that these are the most important questions for them to consider when it comes to financial planning.
At this point in your journey toward financial strength, you already may have great momentum. All you need to reach the goal line is to exercise self-control in a few vital areas. I call these personal finance disciplines the High Five because they are the key to achieving your highest potential in life. They are:
- Saving Awareness and Control
- Spending Awareness and Control
- Work Ethic
By automating or delegating a huge share of the discipline needed to master wealth, you can reserve your energy for situations when it is needed most. This is one of the secrets of the successful people with whom I have the privilege to work. They devote their best to challenges associated with their greatest ambitions, rather than squandering valuable energy on secondary pursuits.
In my previous four posts I introduced my guiding principles of wealth management, along with the first three principles (links to one, two, and three). Today I will discuss the fourth guiding principle, which is one of the most enjoyable for me to use as a financial advisor while helping clients:
Know what is holding you back, spurring you forward, and serving you best
This kind of self awareness is essential to have the energy, confidence, and focus to support your financial plan. Wealth mastery cannot be pursued with out a degree of self-mastery and self-knowledge. You need to know what is working against you and deal with it. You need to know what you have in your favor and use it to the best possible advantage.
In my experience as a financial advisor, I have found that people often lack such self-awareness. So, I have made it one of my guiding principles to take proper time for reflection. With weaknesses especially—habits of mind that can hold you back—people often need a third party or a sympathetic ear to surface issues.
In my last few posts I have discussed my first few guiding principles for wealth management: make your balance sheet your friend and compare your financial plan to standards of excellence. Today I will discuss the third principle:
Back-test and stress-test your financial plan under various scenarios to further reveal strengths, weaknesses, and possibilities.
The “Elastic Limit” is a term I’ve borrowed from engineering because it has tremendous relevance in wealth management and financial planning. It refers to the amount of stress a material can withstand before undergoing permanent deformation. For example, if you stand on a wooden bench, the wood may sag a bit and bounce back when you jump off. However, if several NFL linemen stand on the same bench, the wood will probably warp, crack, or break.
Compare your finances to standards of excellence and use them to make enhancements
When people with wealth describe to me how they view their current position, they use a wide variety of yardsticks to measure themselves. Some are troubled because they are comparing their finances to friends, family, or associates who appear to be much better off. Others are troubled because they have lost a large portion of their net worth through market declines, bad investments, or business setbacks.
It is more common, though, to meet people who feel quite confident and secure because they’re doing much better than they imagined they would when they were younger. Their confidence may be fueled by the good opinion of others around them, since wealthy, successful people are often accorded tremendous respect and kid-glove treatment.
There is nothing wrong with these benefits of success, but you can’t allow them to lull you into false assumptions about your financial position. If you want to know where you really stand in terms of financial strength, you need to employ objective standards of excellence.
Note: This Post will be updated by the author throughout the week ahead as developments unfold related to Brexit
Brexit: an example of creative destruction?
To understand the Brexit ‘Leave’ decision, you must understand one of the most powerful underlying forces shaping our world today: Creative Destruction. Understanding this concept can be the difference between tremendous investment success and failure in the years and decades ahead.
Creative Destruction, a term first coined by economist Joseph Schumpeter in 1942, is the continuous cycle of innovation and destruction behind all economic, business, and life cycles. This concept can be applied to businesses, careers, products…and yes…government organizations.
I have been a long time student of creative destruction and use it as a lens to view the world going through unprecedented levels of change. It’s a comprehensive way to assess perceived and real investment dangers and opportunities.
In business, when bright, creative employees sense they are in a “stagnation mode” organization, they naturally decide to leave the stagnant/status-oriented organization and are often attracted to a new up-and-coming organization that is gaining traction and growing (or promises to grow). Technically, this can leave the stagnant company with less creative talent which can accelerate the journey of the remaining company (theoretically full of bureaucratic, red-tape-type regulators) into a depletion mode. That company either rises to the occasion and reinvents itself or gets further entrenched into stagnation or depletion mode (see graphic).
As for Great Britain and Brexit, could this country be one of the confident/talented equivalents in the European Union (EU) choosing independence and seeking traction and growth on its own terms? I think there is a possible correlation. When someone (or some company/country, etc.) attempts the breakout, they are seeking to gain traction in the new environment and they very naturally can expect to get push-back from the stagnant/status forces that remain. Look for evidence of this in the weeks, maybe years ahead but don’t take it as gospel (it could be fear based PR targeted at undermining the change or it could be a genuine critique). For instance, when electric light was the breakout solution from gas light, gas companies attempted to advertise the threat of being electrocuted as a form of resistance against the breakout threat. The real test for a company, employee or government is: do they have enough gusto and intestinal fortitude to make it through resistance and gain traction with the new idea?
Principles for Devising a Robust System
Henry Ford’s solution to paying workers for time spent “walking about” was a new system, the assembly line, an idea he adapted from the overhead trolleys used in the meat processing industry. “The first step forward in assembly came when we began taking the work to the men instead of the men to the work,” Ford later wrote. That slight but critical shift in thinking led to a huge leap in productivity. Average production times for a car fell from 21 days to 9 hours. The price of a Ford-made automobile fell from $950 in 1909 to $355 in 1921.†
Like any successful system, Ford’s assembly line was designed around guiding principles.
- Each worker would have one task and one task alone.
- The line itself had to be “man high” so that workers would not waste time and get fatigued by constant stooping.
- The speed of the line was calibrated to ensure that a worker was neither rushed nor left biding his time. “He must have every second necessary,” Ford wrote, “but not a singe unnecessary second.”
Lessons in Financial Strength
“A financially strong investor is a superior investor.” This observation, distilled from my 25 years in the field of wealth management, is simple and yet so profoundly true, I decided to make it the motto of my company. All too many investors learned this truth the hard way during the recent financial crisis: You do not become financially strong by achieving superior results; you achieve superior results by becoming financially strong.
Early in life, my family drove home the importance of strength. My family didn’t buy the home we lived in, we built it. My brothers and I helped my father pound in the nails that held the frame of the house together, and you can bet we didn’t just walk away from boards or joists that still felt rickety. My father built nuclear power plants and oil refineries, structures that must be built to last and able to weather hurricanes and earthquakes. His duties gave him a “stronger is better” way of looking at life, which rubbed off on me.
My favorite productivity coach of all time is David Allen, famed author of Getting Things Done.
When you first work with David’s concepts and materials, you think it is all about optimal levels of productivity…but you soon realize his methods also have a wonderful way of unleashing you from all the complexity and worry that often accompanies high levels of achievement.
In one of his audio recordings, he says: “Too controlled is out of control” and this immediately resonated with me. Actually, it articulated the “sweet spot” I have always aimed for as I created (and ultimately patented) Systems and Methods for Optimizing Wealth and most all of the other wealth and investment management systems, structures, support and tools I’ve created over the years. I always have heard that you can have a form of “unconscious competence” that serves you, but you can typically build upon it at an even higher level when you become aware of it and it becomes “conscious competence” – this was the case for me with this concept.
Whether you are seeking to better invest your money or seeking to be a better “depletion-resistant” wealth steward, my advice is to keep the “too controlled is out of control” insight in mind. Here are some tips: