Not Warren Buffett yet

Last week I had a financial planning meeting with my financial advisor. I learnt something I wished I have known 2 years ago, before I lost $200K+ in investment.

The financial advisor and I met at a local Chase branch. After losing quite a bit in past investments, I was cautious in any investment, yet anxious in what Chase has to offer (to help make some money back). I was like a teenager who is recovering from an injury but eager to get back to the football field. We started the conversation with some usual questions — size of my asset and how long this investment is going to be (18 months, not very long). After finishing the inquiries, the advisor suggested a fund called BlackRock. Its return rate was at a moderate 6.45% in 1 year and 6.25% in 5 years. Its risk level is relatively low, and has no upfront fee. It’s not bad. But the optimization side of me pressed the advisor for a few more choices, preferably something with a higher return. My thinking is that fee is just one factor, I want the overall best return, that should be my goal. The advisor did offer a few more choices, but emphasized BlackRock has no upfront fee, at 2%, and should be my choice. I frowned and insisted I want the best overall performant fund, at my acceptable risk level. I even claimed, “I would go with Warren Buffett if I could, and I don’t care he charged a 10% fee!”. “Well, ”, the advisor calmly pushed back, “can you hold it for 5 years? You might lose money if you pay Warren Buffett an upfront fee of 10% and withdraw in 18 months”. That hit me and left me speechless.

For my previous investments, have it be in real estate, or hedge fund, I use return rate as a single performance metric, to reflect the risk and return. For example, a 8% return investment, such as a real estate investment, is considered moderate to me, and a 18% investment, such as a hedge fund, is considered risky. Subsequently, to be on the safe side, I allot most of my investment to the moderate one and a little bit in the risky one. My expectation then is that my portfolio even grows slowly, it is very safe, and should be in the green most of the time. Pretty straightforward business, I thought, until I paid a price for missing a key consideration. While it is true that a 8% investment is “safer”, because of the volatility of the market, the investment could be a loss, in the black, before it generates a return. I bought a second Condo in Seattle in 2007 as investment, thinking real estate investment is moderate. The sales value plummeted in 08, I panicked and sold it for a loss. Have I kept the property, even just for 4 more years, it not only wouldn’t be a loss, but would average a 10%+ return every year. Instead of attributing the reason to lack of longer hold time expectation setting and prepping, I mostly blamed the “higher than expected” risk of real estate investment. Therefore, other than risk return analysis, knowing the cycle of investment and how long can you stay put is also a critical consideration before embark on any investments.

This is different from any other types of investment. Other investments — education, health, skills etc, always trends up. It is rare when you invest, it will go down before it goes up. They might progress at different rate in different phases, but most investment don’t make you worse than what you start with. Financial investment is an exception. Because of this volatility phenomena, we often blame the fund manager or a particular investment choice, but many times it is not the service provider, nor the product, it is simply how long can one dig in and be unmoved.

Three simple tips to avoid this pitfall. First to all, expectation setting. Always have a candid conversation with your advisor about the investment cycle of the particular investment and ask yourself whether the money can be untouched. “Add more when it does well, and pull out when it doesn’t” is the worst way to invest. Secondly, avoid too much monitoring. Most investment providers nowadays offer online access for very up to date data, and monthly statement always find you in the inbox. Warren Buffett’s rule of investment is, Buy, hold and don’t watch too closely. Reduce reporting frequency, or set alert for only major update. No need to watch something every week if it is going to go on for years. Finally, focus on the most important investment, yourself. As cliche as this sounds, it is true. Sounds financial investment can provide security and good living. But your true well being and happiness doesn’t come from that. Let financial investment only be a small part of your life, and make the rest shine.