Date: January 24, 2022

How Tom and Sally Handled Unexpected Calamities With Very Different Results

I’d be hard-pressed to find two more-contrasting high net worth investing strategies than those employed by Tom and Sally (real people, fictitious names). Each faced turbulent markets – Tom at the start of the Great Recession and Sally during the boom, but their responses were quite different. I think it’s instructive to see what drove them to make their decisions and the outcomes those decisions produced.


Tom’s Unsuccessful Strategy

Tom, 62, is an intelligent, hard-working New Haven executive, but back in 1999 he was an undisciplined investor – complacent to risk, greedy, with a euphoric investing strategy. He worked with an investment advisor who reinforced his overly aggressive tactics. The advisor didn’t see the dot-com bust coming and failed to recommend any steps to protect Tom’s wealth. Instead, he encouraged him to pour borrowed money into the stock market. 

In the years leading up to 2000, Tom became addicted to high-risk, leveraged investing. He disliked fixed-income securities and purged them from his portfolio. Instead, he invested money borrowed from his credit cards and a home equity loan and raided his retirement funds to buy hot and other trendy stocks almost exclusively. 

Tom was giddy with his initial success, but woefully unprepared for the market collapse that ensued from  2000 to 2002, holding an undiversified portfolio of speculative stocks to the exclusion of other stocks and asset classes. He had no process or recovery plan if things didn’t work out. 


What Tom Experienced Due to This Failed Strategy

When the crash hit, Tom lost it all, leaving him in debt, with no retirement nest egg and scrambling to prevent foreclosure on his home. He never thought to get a second opinion in New Haven or consider changing investment advisors. As stocks tanked and margin calls mounted, Tom panicked, selling everything. But it was too late. 

If Tom had engaged with a financial advisor in Woodbridge, he would have received advice to follow a balanced strategy before the bust hit – divesting high-risk stocks, adding bonds and alternative investments, and even holding some cash. Moreover, he would have been encouraged not to borrow money to leverage his stock holdings and avoid chasing the overheated bubble market. 

It took Tom several years to settle his debts and restore equilibrium to his financial life, and he has since become a client. Today, he holds a well-diversified portfolio built to accommodate market volatility and future recessions while still positioning him for a handsome return on a risk-adjusted basis.


Schedule a no-sales conversation with the team at Heritage Capital and get a second opinion before making any investing decisions!


Sally’s Successful Strategy

Sally, 59, also lives and works in New Haven, helping run a multi-generational family business. She is an affluent, analytical client who has maintained a conservative investment strategy throughout her life. Sally invests very little in high-risk assets. Instead, she has consistently maintained a balanced, highly diversified portfolio of stocks, bonds, and cash, plus alternative investments such as collectibles, commodities, real estate, and other asset classes. 

Sally never borrowed money to chase stocks and refused to leverage assets to increase returns (and risk). Every year, she rebalances her portfolio to reflect an asset allocation strategy that evolves slowly as she ages. When the Great Recession hit, Sally was prepared.


What Sally Experienced Due to Her Successful Strategy

Sally experienced some losses, on paper, when the recession hit, but they weren’t deep. She refused to panic in the face of the snarling bear market, instead sticking to her long-term strategy. She made strategic, but conservative purchases, taking advantage of discounted high-value stocks with advice from her financial advisor. Today, Sally enjoys considerable wealth and is well-prepared for a comfortable retirement six years from now. 


Lessons Learned

Tom’s and Sally’s stories provide object lessons on the right way to invest, including the following:

  • Diversification reduces risk: The idea behind diversification is that even though any asset class can experience losses, a properly structured portfolio is unlikely to take multi-class losses all at the same time. Simply put, some uncorrelated (and negatively correlated) assets can zig while others zag. By helping to preserve their overall value, diversified portfolios can allow you to withstand a market panic, holding assets you believe in and scooping up bargains when they become available. Moreover, diversification reduces non-systemic risk (that is, damage from an occasional stinker in an otherwise well-performing sector) because no one position is large enough to inflict much overall damage.
  • Asset allocation helps manage systematic risk: You can’t control how different asset classes and strategies will behave, and most investors can’t consistently predict or time markets with any degree of accuracy. But you can adjust your asset allocations to match your risk preferences, as, over the long run, different asset classes and strategies have discernable risk/reward characteristics. By controlling and spreading out your risk, you are in the best position to withstand market volatility, whether foreseen or not.
  • Be calm: Working with the right financial advisor can help you avoid making emotional trading decisions that you’ll come to regret. Being calm means not engaging in frenzied buying or panic selling. Instead, it means establishing a portfolio that can grow over time, regardless of short-term market noise. It also means having a plan to review and rebalance your holdings regularly.

Make no mistake: the market can be a dangerous place. The upcoming two years may see increased inflation, recession, higher taxes, political disruption, and perhaps other hazards that we don’t now foresee. These factors can impact an affluent investor’s portfolio and retirement plans.

But working with an astute financial advisor can help you manage risk to navigate troubled waters whenever they occur. If you are nearing retirement, you need to protect your wealth from stock market volatility and the loss of buying power due to inflation’s resurgence. 

If you aren’t satisfied with your current retail advisor, I encourage you to contact me to discuss a better way to invest. While no advisor can guarantee outcomes, I do pledge to offer sound advice for preserving your wealth with a rational, non-emotional investment strategy. 

Be a Sally, not a Tom – contact Heritage Capital today for a full review of your investments and the other elements of your wealth, including retirement, tax, charitable giving, and estate plans. 

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Paul Schatz, President, Heritage Capital