Four Attributes of Successful Investing w/ Don Calcagni


In this episode of the Science of Economic Freedom, I discuss the critical topic of how to successfully manage your money with my friend and Mercer Advisors Chief Investment Officer Don Calcagni. Don is an expert on all things investing, and his breadth of knowledge will help you understand the key issues involved in truly being able to manage your money successfully. Hint: It’s not all about picking the right stocks or funds.

In this discussion, you’ll discover the four attributes needed to be a successful investor. You’ll also learn why you need to “step outside yourself” to do so, and why doing so includes a keen critique of your past investment decisions.

Additional topics in this insightful interview include:

* The looming retirement crisis in America.

* Why managing your own wealth requires a lot of time, desire and expertise.

* How to hold yourself accountable for your own mistakes.

* Avoiding confirmation bias.

* How to set investment objectives, and how to follow your “compass.”

* Gender issues, and why they matter in retirement planning decisions.

* How to find the best financial advice and expertise out there.

* Plus, key takeaways and actions steps to take right now.

 

Podcast Transcript Episode 20

Doug: What does it take to manage money successfully? Why do you need a plan and an objective to do so? What are your confirmation biases? All this and more on this episode of the Science of Economic Freedom.

Speaker: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.

This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.

Doug: Welcome to the Science of Economic Freedom. I’m your host Doug Fabian. This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones. Today we want to help you identify your next step on that journey.

Just a reminder of the features at the scienceofeconomicfreedom.com, the podcast, special reports and articles are posted for your education, information and motivation. This service is dedicated to those who desire economic freedom and want to discover their next step on that journey. Now you can subscribe to the podcast via iTunes, Google Play or Stitcher.

This is Episode 20, an interview with Don Calcagni, chief investment officer of Mercer Advisors on the four attributes needed to be a successful investor. Now, I have interviewed Don on two other Science of Economic Freedom podcasts. He is a great educator, coach and mentor. In this discussion, Don and I talk about what it takes to be successful with money and why you need to step outside yourself to do so. One of the most difficult steps you must take is critiquing your results and knowing when you need to ask for help. Here is my interview with Don Calcagni.

I wanted to begin the conversation today with asking you the question we have too many financially illiterate people in America. Why do think that is?

Don: I think at a fundamental level, our country has never prioritized financial education. They don’t teach it in the schools. They don’t even teach high schoolers how to balance a check book. So, it’s never been a priority and often times in the past that was probably a function. Certain functions of the financial process have been handled by different members of the family, right? So, traditionally maybe one spouse would pay the bills, another spouse would make the investment decisions or something along those lines but very rarely was there sort of a cross pollination of education around all these different areas of finance. And like I said, fundamentally our schools have not made it a priority.

Doug: Let’s talk about the retirement crisis that we have in America and then I’m just going to bring us back to our subject today. But talk to us why do we have a retirement crisis in America today?

Don: So, my view, it’s very multi-dimensional. There’s not one cause for the retirement crisis. Let’s be clear, it is a crisis. It is at a peak at this point. We have 10,000 boomers retiring every day. The average baby boomer has saved less than $50,000 for his or her retirement. So, this is a crisis. Retiring at 62, 62 is the average age that the people apply for social security benefits. So, they take a significant reduction in benefits. And longevity has never been higher. You retire at 62, husband and wife, there’s a 50% probability that at least one of them is going to live to 90. Think about that for a moment.

So, why do we have the crisis? I mean, part of it can be attributed to the decline in traditional pension plans. 50 years ago, union labor was a much higher percentage of the workforce; they had to find benefit plans and so on and so forth. We have a retirement system today though since the early 1980s with the advent of the 401K plan that has transitioned investment and retirement savings responsibility to the individual and away from the corporation, right? The problem with that system is, like I said a moment ago, we don’t even teach people how to balance a check book, let alone how to design a portfolio.

Doug: So, we have this 401K, the defined contributions, people are making these contributions. Let’s talk about the members of the audience who might be thinking about retirement and in particular one of the discussion points I want to get into here is the fact that many times people are unprepared to kind of manage their finances and manage money. Now, again, sometimes people are do-it-yourself-ers and they’re subscribing to newsletters. I used to be in that business and that was a way for people to be able to get information. But problems happen over time. Talk to us about this.

Don: So, I’ve always said that in order to manage wealth, and I don’t care if you’re of lesser means or somebody who’s ultra-high net worth, you reference the multifamily office experience that I have. I don’t care if you have a hundred million or a hundred thousand dollars. You fundamentally need four things if you are going to manage your wealth successfully. Number one is you need the time. Managing wealth requires time. Not everybody wants to spend their time managing wealth.

One of my wealthiest clients when I worked in the multifamily office environment, he said to once… he was a gentleman with an MBA from the Wharton School of Business. He certainly knew a lot about finance and portfolio management. He said, “Don, I hire you because I don’t want to spend my time managing my money.” He said, “I’d rather spend my time taking my granddaughter fishing.” And that made a lot of sense to me. So, you need the time.

You also need the desire. Not everybody has the desire. Many listeners do. Certainly it’s a free country and many people have the desire to manage their own wealth and that’s great. But you also need expertise and financial markets are exceptionally complex. And unfortunately, we have a Wall Street financial industrial complex that tries to oversimplify it, which I think is a disingenuous attempt to generate revenues. But you need expertise and markets are complex.

You referenced the newsletters, the business that you were in. That’s people attempt to purchase expertise. The problem with that kind of expertise is it’s not custom tailored to that client’s unique situation. It tends to be very generalized in nature. And often times newsletters, in my experience, tend to be highly sensationalized because they’re selling the newsletter service, right? So, it’s not necessarily very academic or authentic or even accurate, and I’m not saying that’s true of all newsletters but certainly the majority would fall in that category.

The final thing that you need is you need accountability. And the problem is when we manage our own wealth, as human beings we have a behavioral bias where we don’t want to hold ourselves accountable. Investors often overlook their own mistakes. So, accountability is missing from the do-it-yourself equation. And again, like I said, it’s a free country, people can do what they want but accountability is critical

Doug: Let’s relate this into some other areas of one’s life. I know there was a point in time when I changed the oil in my car. I certainly don’t do that anymore. You brought the issue of a client or a friend of yours is wanting to spend time with his daughters. It’s a time issue but it’s also talk more about this issue of expertise. I believe our tax code is one of the most complicated, complex laws that exist and how an individual can navigate that by themselves is unbelievable. I just don’t recommend somebody do their own taxes because it’s just too complicated.

Don: Yeah. And if we go back to the changing oil analogy, right? When all of us were growing up, it was relatively easy for us to crawl under our vehicles and change the oil if we had the time. And back then, changing oil was relatively simple. Today, if I were to crawl under a vehicle, a newer vehicle especially, you probably need a PhD in engineering just to know where the oil stick [Laughs] goes. So, things are certainly more complex today.

I have two graduate degrees. I have a graduate degree in tax law and I have a graduate degree in finance. I do not do my own taxes and I work in the business. So, that’s a testament to what you were just saying a moment ago. The tax code is insanely complex. And so, I would argue that I’m an expert in tax law but even though I have the expertise, I’m making a conscious decision not to do that. So, there are many areas of life where even though we may have expertise, there is value in hiring somebody else to perform that function or that service for me or my family.

Doug: Another issue that comes along when you’re managing your own money is the issue of kind of confirmation bias where you have a point of view and it just so happens that everything that you read and see seems to confirm that point of view as opposed to challenging that point of view. You leading an investment committee, part of that investment committee is to challenge different ideas. Talk about that whole concept of confirmation bias and falling in love with a particular stock or security and how important it is to get a variety of opinions in the room?

Don: That’s one of the most powerful behavioral biases. So, just in terms of definitions, a confirmation bias is when people tend to look for information that supports their previously held beliefs. Human beings do not like to look for information that proves them, their belief systems wrong. [Laughs] So, that’s a problem with the confirmation bias. And you see it, for example, on Facebook, you see it online where people only tend to go to websites that tend to support their previously held belief systems.

So, if you’re a believer in Bitcoin, for example, chances are you’re not going to be reading my writings on Bitcoin [Laughs] that have challenged the rise of Bitcoin as a currency. So, that’s one of the problems that we solve with our 14 member investment committee. All members of our investment committee are trained in finance. All of them have expertise. They have time because it’s part of their job to be on the investment committee but we all don’t agree and I think that’s important. And so, one of the things I do in my roles, I purposely look for the members of the committee who disagree with my beliefs and that’s why they’re on that committee.

Doug: In coaching, and again our purpose with the Science of Economic Freedom is to push forth the idea that there is knowledge to be had that can make your understanding of money and your decision making regarding money and finances better. Let’s talk a bit about the importance of planning and having a plan. And there’s a lot of business startups in this country. If someone was going to go into a business startup, I would probably say that they would develop a plan.

But many times planning gets overlooked in individual households and the like. So, you are a certified financial planner. You’ve come through that training. You understand that process. But just talk about planning in general and the importance of planning as someone’s moving forward.

Don: Yeah. Planning, I would argue, is the most important step in the investment process. Every single institutional investor on planet Earth, every single ultrahigh net worth family that I’ve ever worked with, none of them would invest a single nickel without having a written investment or financial plan. So, without the plan, you don’t know how to execute. You don’t know what you’re aiming for. So, the plan is critical. It’s the most important part of the exercise and it’s beyond me.

In our profession we see it all the time where people want to just invest money in a specific strategy but they have no plan. They don’t know what success will look like if it were to occur. They don’t know what failure looks like if it were to occur because they have not documented that. And that’s where we really get into trouble. It’s often said that people don’t have investment problems. Investments have people problems and those specifically are people who don’t have written financial plans.

So, the plan is the center piece. It’s the compass that determines whether or not the investments are actually performing. I’ve talked to so many investors who think well, performance is all that matters. And that is so wrong and I say that as somebody with a pretty deep background in financial mathematics. Certainly that’s important but the real question is, is the investment resulting in the accomplishment of the financial plan’s objectives. Forget the return for a moment. Forget the risk for a moment. Is it helping the financial planning objectives to become a reality?

Doug: Give us an example of that.

Don: So, for example, let’s just look at retirement for example, right? When you retire at 65, we can quantify mathematically how big of a lump of wealth you need in order to retire at age 65 for a given lifestyle, for a given inflation assumption because we know approximately, again mathematically, how long you’re going to live between you and your spouse. So, we know how much wealth you need. From there we can reverse engineer from where you are today to where you need to be at age 65 and solve mathematically for what your portfolio needs to look like, what is the optional mix between stocks and bonds, all right?

Now, if a client continuing to save into their financial plan, they’re funding IRAs and 401Ks and maybe they’re selling a business and things like that, those are other return mechanisms that are helping that financial plan come to life and help that retirement goal, for example, to become a reality. I can’t tell you how many times clients will come to me at age 65 and say, “Hey, I’m retired now. So, my risk tolerance is zero and I should be in a 100% bonds.” That could not be more wrong and I would tell my clients you’re retiring, you’re not dying [Laughs], right? You’re retiring. You have a 30 year time horizon ahead of you so we have to have a diversified portfolio between stocks and bonds, for example just to add a little bit more color to that.

Last year, we had a 22% rise in equities in the SMP500. This year has been a volatile year and many clients have unfortunately, not our clients but I should say investors in the industry have abandoned equities. They went to cash. We saw this at the bottom of the financial crisis. So many investors went to cash in March of 2009 and sat in cash for the next eight, nine, 10 years before they got back into the market because they were looking for a better entry point. Many of those same investors moved back into the market in late January 2018 only to watch their wealth erode 10% in the February market correction.

So, I’ll make two points with that. They sat in cash for eight or nine or 10 years. That’s eight or nine or 10 years that they will never get back. Time is linear, it moves in one direction. So, they will never get that time back. That’s eight to nine, 10 years of market returns that they’re never going to see. So now they have to make that up. So, I think it’s important to separate the investment discussion to some degree from the financial planning discussion because if you’re making decisions based purely on what’s happening in the markets, looking at short term performance, you are going to royally blow up your financial plan and we see it every day unfortunately.

Doug: Let’s just talk for a moment about the fiduciary responsibility that one has in managing money. And I think that this gets overlooked in some families. Now, if you’re in your 20s, 30s and 40s and you’re putting away $500 a month in your 401K, we’re not really talking about that fiduciary responsibility, certainly you should hold yourself to a standard as you are moving through your life cycle. But when you’re in your 60s, 70s, 80s and you’re managing your own money, people many times forget about the fiduciary responsibility that they have to their spouse when they’re managing money. And with now more people living longer and debilitating medical and mental disease, there’s going to come a time that they’re going to need help.

Don: Absolutely. One of the biggest challenges we see the retirement with respect to retirement planning for Americans is that there’s a significant gender bias in the financial industry where… and we see this manifest itself in American households where the investment decisions are generally speaking handled by the male spouse and the female spouse often times doesn’t have an interest or for whatever reason, is not involved in the financial investment decision making. And again, this is a very broad generalization because certainly that’s not the case formally.

But we do see a gender bias in finance. Well, what’s wrong with that? There’s two things that I would argue are actually wrong with that. One is that female spouses will outlive their male spouse counterparts, again speaking in broad generalities. So, eventually our wives, our mothers are going to have to inherit the financial investment decision making. I think it’s incumbent upon male spouses who maybe have held onto that decision making throughout the relationship, 30, 40, 50 years of the relationship, to begin transitioning that or finding a strategy to ensure that the investment decision making is handled properly upon his demise. Certainly my wife and I, we have this discussion quite routinely.

So, that’s point number one. Point number two is academically one of the things we’ve observed in the data is females actually have much higher investment returns than their male counterparts. So, my wife reminds me of this routinely and she’s probably my closest advisor but very interesting data that we see.

Doug: In terms of takeaways from this discussion today and we know the Science of Economic Freedom, everybody’s not a client of Mercer Advisors. Some people listening to this podcast might be clients but what kind of coaching and advice do you have for the audience in terms of where they should be getting their advice, paying for that advice? We’re not trying to jump people from the podcast to our services. We’re really trying to help people understand that they’re going to need expertise. And what expertise do they need? What’s your thought on that?

Don: The first thing I would encourage people to remember is that nothing in life is free. And so, there is a correlation between quality and price in most things in the world. That’s true with vehicles, it’s true with homes, it’s true with so much. It’s certainly true with technology. It’s no different in the financial space. So, I would just caution that when you go into the financial industry and you start looking at different advice type solutions, whether it be a robo advisor, whether it’s working with a full service advisor like Mercer advisors or something in between, just keep in mind that the pricing is typically a function of quality and personalization, all right?

So, I would encourage us to keep that in mind. I pay for CPA to do my taxes and I can hold her accountable, she is an expert. She’s not cheap but I know I’m getting great advice, she’s a former IRS agent. I know she’s going to take care of me and my wife. So, that’s one thing I would encourage people to keep in mind. Number two is I would always encourage clients to do everything possible to identify an advance with the potential conflicts of interest may be.

So, one of the things we’ve witnessed in recent years is custodial firms like Charles Schwab and TD Ameritrade and many other firms are also starting to inch into the advice business. And I’ll use one of those as an example. I won’t mention the name and there’s multiple custodians out there but one of them claims to have a free robo solution and free sounds good. Who would not want free? That’s great but like I said a moment ago, nothing in life is free. [Laughs] So, if you actually look at some of the investment portfolios that they’re recommending to clients, one, they own all proprietary product issued by the custodian and a significant part of the portfolio is sitting in cash.

Custodians make a fortune on the cash balances that clients hold in their portfolios. So, keep in mind that that’s a conflict of interest. It may not make sense for a client to hold seven percent of their portfolio in cash. It makes a lot of sense for the custodians because they certainly make a lot of money on that on what we call the net interest margin. So, just try to understand the conflicts.

Number three, and I’ll stop with number three, is make sure going in that you know what success would look like. So, in order for a relationship whether it be with an advisor, whether it be doing something yourself or working with a robo advisor, I would define what success looks like in advance so that you recognize it when you see it. And I think that will lead to a much more successful advice service that clients will be purchasing.

Doug: Great. Don Calcagni, chief investment officer for Mercer Advisers. Don, thanks for joining us again on the podcast today.

Don: It’s great to be here. Thank you.

Doug: This is one of those podcasts that you may need to listen to twice. Now, remember these four attributes to success. Number one is time. Do you have the time to manage your money? Second is desire. Do you truly want to do this yourself? Third is expertise. Do you have the knowledge to be able to do this? And lastly, it’s accountability. This is a scoreboard exercise and you need to measure your results.

Now, here are the action steps from this discussion today. Number one, how much time are you spending managing your assets? Might as well measure your time investment. Number two, do you truly desire to do this and for how long? There is a finite date when you will need to turn over the management of your assets to others. Are you prepared for that day? Is your spouse prepared? Number three, expertise. Do you have it? How much time, money and effort are you spending trying to acquire it? Number four, accountability. Are you measuring your results? Do you have a target rate of return? Do you have a financial plan?

Just a reminder, if you are struggling with your next step on your journey to economic freedom, now may be the time for a wealth coaching session. In this 45 minute consultation, you will learn what to do to move closer to your financial goals. There is no cost or obligation. The consultation is free. Visit the scienceofeconomicfreedom.com or email me at [email protected] This is Doug Fabian. Thank you for listening.

Speaker: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.

This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.

Talk to Us.