Retirement – Do You Invest Or Do You Save?
I know I’ve been talking about my ski trip to Aspen for some time now. I have just a few more stories I think you can profit from… so bear with me.
As I mentioned before, the annual ski trip is an assembly of incredibly smart guys. All of us are in the finance industry. I go every year with one goal in mind. To listen for great investment ideas. It’s amazing some of the ideas that get thrown about.
One evening I had the privilege of dining next to an asset manager from Canada. This energetic guy shared his views on the markets and how to profit. He’s a strong believer in asset allocation, but he has a very unique way of looking at equities and debt instruments.
Some of his comments really got me thinking.
Before we delve too deeply into his ideas, let me tell you a little bit more. My friend has been an asset manager for some time now… and he’s building his practice. See, he’s very selective over whose money he’ll take. He won’t work with just anybody.
If I had to guess I’d say he has about $150 million under management. Keep in mind, this is a guess on my part. Asking how much the guy manages is like asking how much money he makes – it’s rude. Really, the amount he has under management doesn’t matter… what’s important to know is that he’s experienced.
As we talked over dinner, we argued about market direction, international investing, and even asset allocation strategies. We even shared a few of our favorite stock picks. But the one comment that really stuck with me was his comment about clients.
In his observation, high net worth clients tend to fall into one of two categories. They’re either “Savers” or “Investors”.
I had to stop him there. What did he mean?
He gave me a perfect example. One client is trusting him with just over $5 million. This client is a stock trader for a major investment firm. Now you’d think a guy like this would be willing to take on some risk. You’d expect him to be a big “Investor”. He, better than anyone else, would understand the potential gains to be made in the market.
But you’d be wrong.
This client was a classic “Saver”. He didn’t want to take on risk. His entire portfolio is in bonds. He was upset at the thought of losing just 2% of his capital because of the market turmoil. (Keep in mind some equity investors are down 30%, 40%, and even 50% or more!)
Despite the perception he’d be a risk taker, his focus was on capital preservation. That’s why he was a “Saver” and investing in bonds.
In contrast, other clients understood the potential profits a market could return. They were more willing to take on risk… and they had a big portion of their portfolio in equities. Here’s the important point. You can’t make a “Saver” an “Investor”. And you can’t make an “Investor” a “Saver”.
Because of this, it’s important to understand what kind of person you are. Most of us are not all one or the other. Most of us fall somewhere in the middle. Knowing where we stand help determine the types of investments best for us.
It turns out the “Saver” vs. “Investor” comment was an observation on risk profiles.
The more risk averse a person is, the more they’re focused on saving capital… at the sacrifice of growing capital. So this brings me to another observation my friend had… when a bond isn’t a bond.
It’s a bit complicated (and I’m running out of room here) but this was his comment in a nut shell. High yield bond investments are throwing off huge amounts of yield. Some are upwards of 15%, 18%, 20% or more. This makes them really attractive investments.
Here’s the twist. He classifies these high risk bonds as equities not as bonds. The risk profile of a high yield bond is much like an equity. Big gains are possible, but so are losses. By classifying them as equities, he’s segmenting risk profiles. It allows him to give these investments a unique look.
I found this thinking fresh and original. That’s why I wanted to share it with you. Take a few moments to look at your portfolio. Make sure it’s risk profile matches yours. No sense losing sleep over something easily changed.
Category: Bonds
