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Why your Financial Adviser Might be Right to Have Most of Her Net Worth in Real Estate

Suze Orman is making a comeback.

And the first thing that she did was to get on a Financial Independence podcast and tells the whole world why she hated it. That podcast really got a lot of traffic for the host, and even a few national newspaper wrote about it.

As a part time marketer, I thought she did it deliberately to gain the traction. And now that she has gotten everyone’s attention, she back pedaled on Facebook that  she was fed with some poor research about the subject.

You can read about it here.

However, the reason for my short post today wasn’t on the controversy about whether FIRE movement made sense.

I wish to discuss the topic of giving financial advice and having a wholly different portfolio for yourself.

Marketwatch had a piece that talks about what Suze Orman shared about her own portfolio.

The article summarizes her past slant on financial planning:

  1. “sell after small declines”. Kyith says that this is like selling low after you buy higher, but in his experience it worked out most of the time, even if the Marketwatch author thinks this is not very good advice
  2. “buy things that have been on the rise”. To people this looks like buying high, but Kyith thinks this is a safer strategy
  3. Pay off mortgages first other than matching your employers deferred private pension plan match. The gripe according to the Marketwatch author is that it leaves your portfolio to be very overweight on real estate
  4. Diversification tends to be overly conservative. The danger here is that it will be too conservative that will make you fall short of your financial goals.

Now I agree they are iffy financial advises  but I do think that if you look at that summary, it does look like advice dished out by a person who is more risk adverse, more into wealth preservation, than on taking more risk to build wealth.

We will come back to this later.

Now in the article, the author summarizes what was revealed about Suze Orman’s personal net worth composition:

  • Liquid Net Worth: $25 mil
  • Properties: $7 mil
  • Stocks: $1 mil

I would have thought she had $100 mil from the podcast episode. Her liquid net worth is likely to be built in zero-coupon municipal bonds, which she says  is triple A rated and well insured. She chose the bonds that have a little lower interest rate to make sure that she is 100 percent safe and sound.

She says that that she only has $1 mil in the stock market and that if she loses it all, she “don’t personally care”.

The MarketWatch guy says that you need to be wary about taking advice from someone who lives and manages their money in a very different way then yourself.

I think I am on the fence on this one. And especially so because on and off I do have readers send in questions and their situations are totally different from me.

So here are some of my thoughts.

Just because they do not manage their own money like their advice doesn’t mean the advice does not hold weight

It doesn’t mean that if the adviser, trainer and mentor is doing things differently with their own money from what they are teaching that it is often a red flag.

One of the recommended ways to test your adviser people say is “ask the adviser what they invest in or how they allocate their net worth”

And often you will see your adviser having a large amount of their wealth in real estate than in investment linked policies, unit trusts or endowment plans. (as a caveat I do have friends who are advisers and have adequately big allocations to these products)

This is you trying to validate the advisers conviction in what they are selling.

If the product that they tout is so good, how come they sell this to you yet they do not own any?

Their argument to this is their situation is different from yours.

This is a perfect argument! Basically they are saying they made it, and you are still in the process of making it. Once you made it, you can also shift to what they are doing.

When it comes to advisers there is always that alignment of interest issue.

However, I feel that sometimes going conservative make sense.

Why is that?

Suppose most of our financial goal is to achieve financial security, like what I often write about.

Now according to my last article on the definitive guide to variable withdrawal strategies, your family expense is $48000/yr. But you can feel rather safe with $36000/yr.

Now suppose you were an entrepreneur and after you sold off your business, you will have $5 million dollars.

How should you deploy it?

Let’s analyze this based on the constant inflation-adjusted withdrawal rate. This means that year 1 you withdraw $36000/yr, year 2 you increase that by the inflation rate and so on and so forth.

Now your withdrawal rate is 36000/5000000 = 0.72%. If we take your current expense and work out your withdrawal rate we get 48000/5000000 = 0.96%. That is an obscenely low withdrawal rate.

By all fundamental reasoning, your money can last you, inflation adjusted, if your spending patter is the same.

You could envision yourself putting that $5 mil in 70% bond and 30% stock allocation in low cost funds and your wealth would still outgrow your spending.

You have reached your financial goal, or in our terms, have won the game, so does it matter to put all your $5 million into another start up venture?

Does it make sense to put your money in so that you walk the talk if you are teaching people how to start business?

I think viewed independently, when you think you have reached that financial goal you tend to be unsure how concrete if that amount is enough. So the sensible thing is to step down and de-risk.

Business always runs a probability distribution that the tails are fatter. You get successes and also big failures.

Your money is suppose to satisfy some financial objectives that supports a life goal.

You have to accept that there are risks in financial management, and for yourself and everyone, it makes sense to de-risk and aligned to your true financial objectives.

But does that mean that you do not have the experience to share with people how to have an effective businesses?

I think your competency in a subject is sometimes separate from how you build up your wealth.

Suze Orman probably in her long career have seen enough. Perhaps she has seen how fickle the market is and that is why she advocates sell when the losses are little, buy on the way up, pay off your mortgage.

Our financial philosophy are often affected by our experiences.

And her experience is due to having read so many of her past reader’s financial situation.

In the Financial Realm, Having Skin in the Game is Important

This will contradict with the advice I provided above.

Our problem is that in this world there are many tricksters who wishes for you to part with your money and they will not feel morally punished for you losing your money.

There are also a lot of folks who have not build up competency and are trying to make it in this world.

So if you cannot judge folks by what they do, what could you do?

I think this is tough, and you really have to vet the person’s competency by having more information about how well they are managing your money, or how they teach people.

This can be speaking to a few sources, of people attending their curriculum, know them personally and folks that tend to be rather objective in their views.

In the financial realm, having skin in the game is more important than when they do not have.

Can you imagine a forex trader not having adequate part of his net worth trading forex? If this is a “sound way to make money safely”, then why does he or she have such a small amount of net worth in forex?

As a side note, from what I know, traders personal portfolio seems very barbell in terms of risks. They will have a portion in their trading portfolio, then a large chunk of their gains and capital will be in real estate or safe bonds.

Why is that? You got to ask them!

Can you imagine a value investor not have a chunk of his portfolio in value stocks? In value investing, trainers often say to purchase financial assets with adequate margin of safety. So in this regard, they should be able to stay in their stocks even in more turbulent times, because these are mostly noises. However, when they cannot find value stuff to buy, often it mean that it is time to sell, and they would hold larger cash position.

So you should see them having stocks and cash in their position.

Can you imagine a financial adviser, who says endowment is safe, unit trust is good for building wealth, not having a chunk of her net worth in endowment and unit trust?

If things are fundamentally sound according to your adviser/mentor/trainer, then why aren’t they comfortable having a chunk of their money in it?

Respecting Portfolio Management and the Phase of Wealth Accumulation and Wealth Preservation

What is lost in translation, or not emphasize well, is the role of portfolio management and respecting the phase in the game.

<Phase 1: Wealth Accumulation —> <Phase 2: Wealth Preservation / De-accumulation —>

For most people their financial life is somewhat like the illustration above.

Your course trainer usually takes care of Phase 1.

And often, to increase the rate of return, you have to be more entrepreneurial about things.

This means take on more risk, hoping that the reward (rate of return) are greater.

So the examples are:

  1. Learn to competently trade forex / futures
  2. Concentrate your portfolio in a few stocks instead of diversifying
  3. 100% equities allocation
  4. Start business venture

The potential returns are higher, and suits the wealth accumulation phase.

When the game is won, the game plan for Phase 2 is very different.

I do call the management of your financial assets in phase 1 and 2 portfolio management. And I do write about it more in my Active Stock Investing section of my content.

And this is the portion that ensure you win the game and stays in the game.

Wealth Builders couldn’t Distill the Draw Backs of each Wealth Building Method, And Trainers Don’t tell them these Draw Backs

I do find that unless you understand the portfolio management part of all strategies, you won’t understand why Suze Orman’s net worth is like that.

I think in a lot ways of wealth building there are draw backs.

They are either:

  1. prone to low probability but high impactful draw downs
  2. tail events (you made your money but in reality those that made money in these systems are rather low)
  3. liquidity and credit risk
  4. cannot be scale up (some systems if you reach a certain size, they might work against you)
  5. high cost work against you

The experienced wealth builders know the existence of these risk in their system.

A good mentor / trainer / adviser will let you know about them.

You might not understand it now.

But as you venture further in, you would.

However, it is those trainers and advisers that understands this, yet do not tell you the true picture that is a big problem.

If your adviser doesn’t share the downside of the plans that they advise, such as the high cost, survivor-ship bias are big problems, then they are doing a disservice.

As wealth builders, always seek to understand the whole system. Most systems have their flaws. It does not mean they are all no good (some systems just do not work period, they are scams).

You would need to mitigate certain aspect of the system.

In a lot of things, portfolio and risk management solves a lot of things.

Summary

While I do not like the way she does things, I thought the Marketwatch article showed that what she is doing is reflective of her risk adverse nature and her respect of her financial goals.

Would you trust her on her financial management advise?

I think financial advise is always challenging, particularly because those giving adviser are not your advisers, and do not know your situation well.

So your mileage will vary.

Your adviser might have a lot of her money in real estate, but lets not kid ourselves that, when you reached her position, you would want to do that as well.

Even though I think that might not be the most fundamental sound thing.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often.

Here are My Topical Resources on:

  1. Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money

 

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