Reading this sentence caught my eye. “If the average annual return goes up a bit, and the average volatility goes up a lot, and you don’t desperately need that extra return to meet your needs, you need to stop and ask yourself what you are doing.“ Lowering the Bar by Suzanne McGee In this she talks about change of attitude of baby boomers and a need that they lower their expectations.
I also wonder too, in terms of business modifications to the Need not Greed approach she refers to, as we are now forced to shift gears to be more risk management alert for all ongoing investments be-it personal or business.
Being a baby boomer myself, some years ago my wife and I took the plunge to manage our own family investments. Some said it was folly to learn by mistakes and take risks, when professionals could do not that for us. However it was not so much about balancing greed or need that has saved our family nest egg as stock markets have all but halved in recent months. More the truth is a balanced approach with the rigor of team oversight that has ensured our caution on changing things that work to things we didn’t understand.
We learned that self-accountability was a big one to master and that it depends on having some checks and balances for objectivity and ongoing motivation. Previously we could leave it to the professionals but then even though the prizes were high, taking big chances on an asset like a nest egg, never seemed to have had a good feeling, when we considered long term. Assisting the process too. (albeit sometimes annoying) was the ever present regulatory and reporting control that also imposes risk limiting investing rules on certain compliing funds receiving tax breaks.
While we considered strategy together my wife did very well on day to day operational decisions of buy and sell. On the control side, which was my job, we had some issues. A spreadsheet did an okay job for a while, but we found it inadequate to track and analyze the entire dimensions we needed to see everything operationally. We then moved to some all singing all dancing online software tool with an attached advisory service and subscribed to several high priced newsletters. But that all got too much too when we saw our expensive subscriber system and its advisors go out of business.
We then set up an analytical database service for managing our equities tracking, and linked it to a to an on-line information service feed (mostly free). From there it was easy for dally tracking and to sit down quarterly to review our positions and plan our next moves.
One thing we are thankful for is we set up the meetings formally outside out daily ebb and flow of activity and used performance reporting tools to bring it to focus. An hour or so of strucured discussion each quarter was all that was needed to ensure we stayed on track; followed by a night out for dinner together, which made for a good recipe to ensure we maintained our pledge. It proved so productive in spite of our mistakes. The simple act of just stopping to review our experience routinely gave us high vigilance and alerting ability for all our funds and asset performance. And using only simple analytical formats this kept us abreast of long term and total value growth as well as daily detail to give us confidence that we have each risk perspective was under control. And even though, like everyone investing, we could not avoid taking a beating on equities, in our case we have mostly blue chip, so the long term will likely come back. And for our business ventures as part of our family investments, our objective is to ensure we are running them this way too.
In essence our portfolio management is no different to business. We work as a team to plan and review all parts together; operationally we have separate responsibility for executing the day to day sharp end decisions with support and control jobs being independent. Being able to factor in forward plans with some confidence in the predictability of our forecast outcomes is our bonus; now with our equities and like business without it like many we’d be panicking and making more mistakes too.
But in businesses, as opposed to personal investment, tactics and the associated risk attitudes seem different. Or are they? In fact the governance process is quite similar. In a bull run with its ever upward sales and product demand being all forgiving, taking some risks seems less of an issue. Conversely it can be quite fatal to learn by mistakes in a downturn especially for those highly geared financially. So the need now, more than ever, is a review process on exposed weaknesses with balance and objectivity to keep us from getting right out of our depth.
Even a husband and wife business team needs transparent and objective review of various aspects of risk across the spectrum of their business and respective roles that manage it. For most small business for good control a simple hierarchy of management and a feedback system can do the job. And despite the shortcomings even just a simple web shared spreadsheet with plans, critical success and operational measures on it, can work as you progress from there. Regardless of size more than ever a Board of Directors model, even for the two man shows, will take seriously shared views of the same position. This model is no less relevant to Small or Non Profit organisations, as it is to large enterprise or multinational corporations. And if you cant invent one that works perhaps engage your Accountant.
With the right tools, shared resolve and someone to hold you accountable it makes it more fun. I wonder how many have a built in Chairman of the Board process, to routinely stop us and ask “What are you doing and does it fit the plan?”