“Maximizing returns” is a phrase that you’ll hear bandied about ad nauseam on both Wall Street and Main Street.
As in, “My goal is to maximize my returns.”
Is it though? Is that really the goal?
Bronnie Ware would beg to differ. More on her in a moment.
Personally, I can’t remember coming across anybody who I would have surmised to be living a full, peaceful and centered life around the primary goal of maximizing their returns, and it’s pretty easy to see why. There can always be greater returns somewhere, and odds are that if you look hard enough, you can find someone who got them.
An alternative phrase that I have been continually encouraging clients to consider involves the idea of “minimizing regret.”
“How do I minimize regret?” feels like something that you can answer in much greater capacity and with a much more satisfying journey than the question “How do I maximize returns?”
This is true in investing as well as in life.
Back to Bronnie. Ms. Ware is an Australian nurse who spent several years working in palliative care, caring for patients in the last 12 weeks of their lives. On her own path, she decided to record her patients’ dying realizations in a blog, which garnered such praise that she put her observations into a best-selling book called “The Top Five Regrets of the Dying.”
Ware writes of the amazing clarity of vision that people gain at the very end of their lives, and how we might learn from their wisdom. The following is a summary of her patients’ collective top five regrets (quoted material is from her book):
I wish I’d had the courage to live a life true to myself, not the life others expected of me.
“This was the most common regret of all. When people realize that their life is almost over and look back clearly on it, it is easy to see how many dreams have gone unfulfilled. Most people had not honored even a half of their dreams and had to die knowing that it was due to choices they had made, or not made. Health brings a freedom very few realize, until they no longer have it.”
I wish I hadn’t worked so hard.
“This came from every male patient that I nursed. They missed their children’s youth and their partner’s companionship. Women also spoke of this regret, but as most were from an older generation, many of the female patients had not been breadwinners. All of the men I nursed deeply regretted spending so much of their lives on the treadmill of a work existence.”
I wish I’d had the courage to express my feelings.
“Many people suppressed their feelings in order to keep peace with others. As a result, they settled for a mediocre existence and never became who they were truly capable of becoming. Many developed illnesses relating to the bitterness and resentment they carried as a result.”
I wish I had stayed in touch with my friends.
“Often they would not truly realize the full benefits of old friends until their dying weeks and it was not always possible to track them down. Many had become so caught up in their own lives that they had let golden friendships slip by over the years. There were many deep regrets about not giving friendships the time and effort that they deserved. Everyone misses their friends when they are dying.”
I wish that I had let myself be happier.
“This is a surprisingly common one. Many did not realize until the end that happiness is a choice. They had stayed stuck in old patterns and habits. The so-called ‘comfort’ of familiarity overflowed into their emotions, as well as their physical lives. Fear of change had them pretending to others, and to their selves, that they were content, when deep within, they longed to laugh properly and have silliness in their life again.”
I’ve observed that one of the fortunate consequences of this rather unfortunate situation we all now find ourselves in is that it has allowed many to reflect a bit more on their lives in two distinct ways: to look back at some of the things they may have taken for granted, but also to look forward and reexamine some of the goals they would like to accomplish.
With any bear market – regardless of the circumstances associated with it – comes a reassessment of people’s tolerance for risk.
As you know, we believe in building a portfolio allocation based on your A) need to take on market risk (ascertained by building out detailed goal-attainment projections), B) willingness to take on market risk (more art than science), and C) ability to take on market risk (the time horizon between your age and the desired timing of your most important goals).
I’d like to quickly address variables A and B.
Let’s say we run a plan and we determine that you have a 90% chance of successfully meeting your goals with a 70% allocation to stocks. Let’s also assume that I can construct an alternate portfolio where you also have a 90% chance of success, but with only a 55% allocation to stocks. You reflect on these two options, and you decide you’d like the 70% allocation to stocks.
This is where I would gently ask you, “Why?”
Now, you may say something like, “You know, I’ve listened to you over the years, and I’ve concluded that I am more afraid of the insidious erosion of purchasing power over time than of the long-term risk of owning equities, and I believe equities give me a much better chance to fight that erosion of purchasing power than fixed income bonds. Also, I have a stomach of steel, and do not worry at all about how I’ll feel when the inevitable bear market returns and, hopefully for only a short period of time, negatively impacts the value of my portfolio.”
If you said that, I would say, “Eloquently stated. You’re allocated with your eyes wide open, and you’ve weighed multiple uncertainties of life in an appropriate way for you.”
But if you said in so many words that you’d rather the higher allocation to stocks because you want to get better expected returns, I would encourage you to look through the lens of “regret minimization” as much as you’re looking through the lens of potential “return maximization.”
While the need and ability to take on market risk will change as your goals evolve and as time marches on, it’s the willingness to take on market risk that has been most affected by our current experience. Tolerance for risk is a funny thing, and as I said, it’s often more art than science. We need to be aware that each and every one of us will perceive risk differently when the sun is shining versus when there’s a pandemic outside our window. You see, it’s oh-so-easy to overestimate your tolerance for a risk that you can’t see or can’t imagine.
But the reverse is also true. It’s often difficult to see the projected reward of a risk when that risk is right in front of you but the reward is miles down the road.
It’s OK to admit that your tolerance for stock market volatility might not be what you thought it was. It’s always OK to reassess; no, it’s more than OK – it’s wise. That said, your wealth advisor will encourage you to think through the multitude of risks that may lie ahead, not just the one in front of our faces.
It’s very difficult to be objective and unemotional about your own situation during extremely stressful times. When outcomes are uncertain and the stakes are high is when all of our behavioral glitches seem to peak. And this is a major reason why an objective advisor can be so valuable. Our goal is to help you deeply understand your own personal need, willingness and ability to take risk. Many of these discussions are rooted in academic science, but not just investment science. We are all human, so behavioral science also plays an important part. What good is a solid academic plan if you are emotionally uneasy for much of the journey?
We work our hardest to help you build a financial plan designed with your fullest life in mind, whatever that particular phrase may mean to you. These conversations are often successful; other times they’re a work in progress. But I, for one, will keep at it, as nothing fulfills my life more than helping others fulfill theirs.
It’s never too late to minimize regret. It can start today. Often, minimizing regret requires no money at all, simply a change in mindset and action.
Doug Buchan is a wealth advisor with Buckingham Strategic Wealth.
Beacon Hill Private Wealth is an independent, fee-only, fiduciary investment advisor providing evidence-based wealth planning solutions that simplify our clients' financial lives. Founder Tom Geoghegan, CFP®, MBA is also a member of the National Association of Personal Financial Advisors (NAPFA).
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