Clarity of Purpose after the Storm

Houstonians have had our share of tragic weather events, but it doesn’t make this one any easier.  Despite the tragedy, it is amazing to see this city (and the country) come together and begin re-building.  Neighbors helping neighbors.  Strangers helping strangers.  As families move from the clean-up stage to the what’s-next stage, many are at a loss about where to go from here.  I’ve heard people in their state of shock, “Should we rebuild?”, “Do I retire earlier than we planned, sell the house and move to the Hill Country?” and “I don’t know what to do.”   

In the wake of difficult times, some people experience the clarity of mind to really understand what is important.  I heard a mother staring at her water-damaged belongings say, “These are just material items, they can be replaced.”  Taking stock of our physical assets can lead to evaluating other areas in our lives.

We go through our lives on a certain track, but sometimes inertia takes over and we lose sight of what brings meaning to our lives.  Events like Harvey may bring into focus what you would want to change and what possessions are worth replacing.  Figure out what is meaningful, and find what brings purpose and joy to your life.  Volunteering and donating are certainly ways to find meaning.  To help with the devastation so many are dealing with, here is a list of some of the many worthy charities.

Houston Food Bank http://www.houstonfoodbank.org/

Houston Diaper Bank  http://www.houstondiaperbank.org/

Houston Habitat for Humanity https://houstonhabitat.org/

All Hands Volunteer https://www.hands.org/

Salvation Army Houston http://salvationarmyhouston.org/

Jewish Family Service   http://www.jfshouston.org/

Houston, We Have a Problem

Risk. 

It’s the scary word that we try to avoid, manage and eliminate from our lives.  The stock market is risky, no doubt. There are crashes and entire decades where the returns are essentially zero; however, to- date, the long-term direction has been up and to the right, steadily increasing in value over time.  It has been a remarkable way to compound your assets. That is the entire stock market-- a diversified portfolio of companies. Beneath the surface, there are segments with fantastic returns, and those where whole industries that have vanished.  Financial history is riddled with stories of blue chip companies like photography giants Kodak and Polaroid, or internet companies like Netscape and AOL more recently, who’s products and services haven’t stood the test of time.  Concentrated portfolios can lead to substantially more risk.

Existential risks to sectors will only increase as the world becomes more digital and technology-driven.  There is one such threat which may acutely harm Houstonians- the health of the energy sector.

Many Houstonians already have a lot of their wealth tied to the price of crude and crude products.  Their jobs, company stock options and home values are inextricably linked in the health of these markets. Much of this cannot be helped (your job is in Houston and you must live somewhere), but a behavioral bias that affects many is a sense of control by investing in a market that they know. For Houstonian that is the energy sector.

This concentration is unwise, especially since there is a chance there are catastrophic risks due to three major factors. 

Environmental Regulations-- China is pushing for 12% of new cars to be electric by 2020, and just last week, France issued a statement that all new cars will be electric or hybrids by 2040.  Automakers are preparing for this as evidenced by Volvo’s announcement this week that all their new vehicles will be electric or hybrid by 2018,

Proliferation of self-driving cars—Billions of dollars are being spent to figure out how to make self-driving cars a reality.  If this becomes the norm, due to the cost structure of battery-powered cars and relative ease of computers driving electric cars, the fuel powering transportation will shift even further from oil to electric.

Falling cost of production-- As the marginal costs drop, it becomes easier and cheaper to find oil and gas, exasperating the oversupply problem. 

The increase in electricity usage at the expense of gasoline, combined with the lower marginal cost of exploring and producing crude may significantly change the crude and refining markets permanently.  Blue chip companies with billions of dollars of hard assets could be severely affected if the need to refine crude or transport gasoline around the country is cut.  If crude prices were to drop into the $20s per barrel, exploration and Production assets with higher production cost may be white elephants. 

While this scenario may seem far-fetched, it is certainly a possibility, and must be considered when looking at your overall risk.  Working with a financial advisor can help ensure you are thinking through these and other issues, to ensure you don’t have a “crude” awakening.

Do Traders Need A Financial Advisor?

Why would a commodity trader, a master of buying and selling some of the most volatile markets need to hire someone to help manage their wealth? Actually, there are some very good reasons an independent advisor can benefit you and your family in the long run:

Focus on What You Know: With a demanding profession, the burden of managing your assets may be a secondary concern. With an independent advisor, you are hiring a fiduciary who is looking out for your best interests.  An effective advisor will construct and manage a portfolio consistent with your objectives, allowing you to focus on the markets that should matter most—the ones you are trading—without worrying that your long term goals are at risk.

Harmful Myopia and Impulse Trading: While you are focused on your particular market, it is easy to extrapolate the fundamentals of your niche to the broader markets, even when that correlation may not exist, thus clouding your judgment. This may lead to rash “dump it all” or “buy everything” moves in your portfolio. Instinctual moves may be appropriate for your trading book, but may do irreparable harm to your longer term goals of paying for your children’s college and funding your retirement.

Make Lemonade from Lemons: With a volatile-earnings profession, there are tactics you can employ to take advantage of your lumpy income. For example, during low earnings years, consider Roth IRA conversions or opportunistically take long term capital gains on appreciated assets. On the flip-side, in high income years consider contributing to a Donor Advised Fund to lower your taxable income.

Separating the goals and risk profile of your job from that of your general overall wealth is critically important. Hiring a professional wealth manager for the bulk of your nest egg makes a lot of sense, for both your peace of mind and your wallet.