Recently, I had the chance to catch up with an old friend who is a third-generation stone mason. There are not too many of these tradesmen around anymore, particularly one as skilled as this fellow.
Tall and lean, my old friend can build and restorefoundations, barns, churches, and fireplace hearths to exacting standards. If there’s stone or brick around, he can create a masterpiece.
This fellow commands a high price for his expertise and has enough work to last several lifetimes. But, as you can imagine, working with stone takes its toll on your body. Still young, for the last few years my friend has been doing fewer and fewer masonry jobs. Several
months ago, he sold his home and workshop, then retired. He still does masonry restorations, but only sporadically.
After many years in the same house, this hard-working fellow deserved his retirement. His body just can’t take the abuse anymore. With his mortgage already paid off, he built quite a nest egg for himself. Being totally green when it came to investments, he went to his local bank looking for financial advice. Naturally, with a lot of cash in his account, the bank proceeded to sell him a lot of product. It reminded me of my old days in the brokerage business where I quickly learned that stocks and bonds aren’t purchased, they are products that are sold by trained salespeople.
After communicating his desire to invest his money in safe, income-generating securities, an investment plan was created for my friend and he signed up without any questions. The result was a portfolio made up of cash, bonds and stocks, mostly in the form of funds. The only problem was that the total equity allocation was a whopping 85% of the total portfolio! In this market!
Knowing virtually nothing about what securities he actually owned, he called me up asking for help. All he knew was that the money from his house was slowly disappearing. He couldn’t sleep at night knowing that the money from his only asset he had worked hard to build up was dropping by thousands of dollars on a weekly basis.
I scolded my old friend for letting someone sell him products that weren’t appropriate for his risk tolerance. I also scolded this so-called investment adviser for creating an investment portfolio that was entirely inappropriate for this investor. The result was a reallocation of equities to 15% from 85%. The rest was allocated to bonds, cash and some other income-generating securities with a low-risk profile. The amount of income the portfolio generates is now secondary to the preservation of capital. Finally, the retired stone mason can sleep at night.
I’ve seen the same thing happen time and time again in the investment business. When someone has money to invest, they are sold a lot of products.
Most people are like my stone mason friend. They work hard their entire lives and aren’t well-versed in what to do about their investments. The fact is that if you don’t understand what you own, then you shouldn’t own it in the first place. According to the stone mason, he’d rather own an inventory of nice stones and mortar than roll the dice with stocks. Luckily, he didn’t own too many stocks for too long.