The Planner's Perspective: Boring Isn't Always Bad

Paul Morrone |

By Paul Morrone CFP®, CPA/PFS, MSA

It seems like every week there is a new story about an athlete that was burned by their financial advisor. A quick google search on this topic will yield more results than you care to read, but there is one common thread throughout all of these stories. Seduced by the potential of massive double and triple digit returns, many athletes dumped millions into speculative investments in casinos, real estate, private equity and other businesses that were moonshot ventures at best. They also implicitly trusted their advisor when in fact they should have been doing more due diligence as to how their life savings was to be invested. While putting capital at risk is an inherent part of investing, putting a significant portion (if not all) of one’s net worth into illiquid, risky and unproven programs can spell disaster as evidenced by the stories of Clinton Portis, Mike Tyson, Darren McFadden and Tim Duncan, to name a few.

While the traditional stock and bond asset allocation that many ‘normal’ investors are accustomed to may not have the pizzazz of a private investment program, in this case ‘boring’ doesn’t mean bad. And in the cases mentioned above, a more traditional portfolio would likely not have landed many of these individuals in bankruptcy or worse. While there are a myriad of alternative investments that may be suitable for more sophisticated investors or those that can afford to hold illiquid assets for a long duration of time, there should always be an emphasis on liquidity and transparency for a portion of an individual’s net worth.

Publicly traded securities such as stocks, bonds, mutual funds and ETFs are required to adhere to strict disclosure requirements and offer transparency that speculative private programs do not. This is imperative so that you know what you own and you generally know what your investments are worth at any given time as most liquid investments are priced intra-day or daily at their net asset value (NAV). While this does not by any means guarantee positive performance over the long term, it helps investors and investment managers make educated decisions with the intention of providing positive results. Furthermore, a diversified portfolio with multiple holdings can help to reduce the concentrated risk of having all your eggs in one basket, giving you exposure to hundreds or thousands of well-established companies, asset classes, or markets instead of just one or two.

In most cases, traditional investments also offer liquidity which is necessary to convert your investments to cash in times of need or want. Cash is critical when you need to pay for large expenses such as a college education, a new home or generate retirement income. Knowing how much cash you can generate from your portfolio on a long-term basis is key to making educated decisions over the short and long term.  

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.