The Resilient Investor
A Plan for Your Life, Not Just Your Money
By Hal Brill, Michael Kramer, Christopher Peck, Jim Cummings
Berrett-Koehler Publishers, Inc. Copyright © 2015 Natural Investments, LLC
All rights reserved.
Facing the Future
Why We Are Expanding Your View of Investing
We have laid out a radical new map of the investing universe, and we are inviting you to navigate your own path across this vast terrain. But before we start exploring the nooks and crannies, let's take a moment to ask the fundamental question: why invest?
Some would say this is obvious—we invest to build wealth. And what's the point of building wealth? To be secure? To then build even more security and more wealth? Isn't that what we all want? Well, no, at least not in the way it is usually presented. While we take it as a given that most people want to increase their financial assets (at least up to a point) and have some nice things, traditional measurements of personal wealth are inadequate, often ignoring that which gives us the most satisfaction. Economists measure our "standard of living," but what we are really after is a higher "quality of life"—and while there is overlap, those two are not the same thing! The point of investing, we would suggest, is not just about having more but about being happy in a full, classical sense.
Let's look back—back as far as 2,500 years—for help in answering these questions. Aristotle, writing in the Nicomachean Ethics, described the point of a well-lived life, the goal we should be aiming for, as "blessedness." For Aristotle blessedness meant enjoying family and friends, with a deep feeling of well-being and contentment. In our day this ideal might suggest a mature experience of knowing one's mission, succeeding at pursuing that mission, having a solid primary relationship and close friends and family, having sufficient financial resources to live well according to one's own standards, making a contribution and leaving a legacy one can be proud of, and staying in right relationship to the natural world that sustains life. It is not about more—it is about better.
We do not think of investing as simply a professional, numbers-crunching discipline; for us it is something much more fundamental. We believe investing should support financial goals (buy a house, start a business) and it should support the bigger and deeper and more profound purpose of a life—Aristotle's blessedness. Investing can help each of us live a better life, and it can help improve communities and build a better world for all.
To do this we must first break out of the confines that limit our ideas about wealth. Financial choices are just one part of a continual process of giving and receiving, balancing risk and reward, and exchanging time, energy, and money with those around you. So let's make room for values and communities, for society and the earth. And let's expand our vision to include the interior realms of emotional and spiritual well-being as well, which are enduring elements of healthy human development. By doing so we are bound to get results that are more relevant and more life-nourishing.
One World, Many Futures
Hopefully, you are feeling enticed to put some of your valuable time into this soaring vision of investing. Be aware, though: you're going to need a pioneering spirit. In these volatile, uncertain times, the old road maps that guided twentieth-century investors are obsolete. The landscape has changed, and you'll be traveling on new pathways that have yet to see much traffic. This can be disconcerting, as it lacks the appearance of stability—that Rock of Gibraltar that was once an icon of the financial industry but turned out to be a mirage.
The uncertainty that plagues today's investors became clear to us over the past several years, as clients and friends shared their notion that the world has come unmoored and that business-as-usual is no longer a reliable anchor for making decisions about their investments—or their lives. While these wide-ranging conversations are often rich with insight and full of passion, our role as investment advisors asks us to act from an objective view of the world, free of personal and emotional bias. As you can imagine, this is no easy task!
The global economy has proven to be remarkably resilient, having adapted and grown in spite of (or because of) dramatic, world-shaking events. So it seems likely that our fundamental social and economic structures will remain intact, at least into the near future. Yet the potential for disruption—sudden or slowly mounting social, economic, and environmental upheavals—has increased to the point that it may make sense to hedge our bets on that front.
On the other hand, we see that rapid advances in technology, along with the interconnection of global civil society, contain a wealth of creative promise that we have just barely begun to glimpse. This could catapult us forward more rapidly, and in different directions, than we have imagined.
With this awareness comes the need to give due consideration to several plausible futures that are beginning to emerge, co-existing in ways that are already visible. We will flesh these out more in chapter 6, but, for now, here is a sketch of the future landscapes that are coming into view. It's important to stress that we do not suggest that any one of these is likely to dominate our future or that they are equally likely—they are archetypal images that we'll be using in a much more nuanced way.
* Global scenario 1: breakdown, "the long emergency"
Social, economic, and/or environmental meltdown, leaving the global economy in tatters
* Global scenario 2: muddle through down, "relentless struggle"
Rolling recessions amid a failure to address the systemic causes of social, economic, and environmental decline
* Global scenario 3: muddle through up, "incremental progress"
Gradual improvement of key quality-of-life indicators within the status quo framework of political and economic systems
* Global scenario 4: breakthrough, "rational emergence"
Exponential social innovation, new technologies, and the evolution of wisdom/consciousness to deploy them wisely
What do you think? Are there any that seem absolutely impossible to you? Can you imagine that aspects of any and all of these descriptions could come to fruition?
Most people have been making investment and life plans based on the assumption that we will continue living under some variation of a muddle-through scenario. Relatively few have seriously considered, let alone prepared for, scenarios that upend the status quo structures upon which these investments rely. Of those who have taken action, some have done so in a reactive way, rashly bailing out from the global economy in anticipation of some sort of apocalypse, or perhaps dreaming of a prophetic worldwide awakening.
But preparing for a range of possibilities can be done in a healthy and balanced way. As a resilient investor, you'll want to at least consider them all and will likely take some steps that will help you adapt to any scenario you see as possible, even the ones that you consider unlikely. This will help you face the future with fresh eyes and provides a framework that lets you move forward with confidence.
Time for More Baskets!
Diversification is, at its root, a response to the ancient admonition you might have learned from Grandma: don't put all of your eggs in one basket. If that basket drops, they could all break, ruining your and Grandma's breakfast! This proverb can be traced back to the seventeenth century and was popularized by Cervantes in Don Quixote. (Later, Mark Twain, ever the contrarian, proposed the exact opposite: "Put all your eggs in the one basket and—watch that basket!")
The wisdom of Cervantes goes nearly unquestioned today. Virtually every reputable financial firm teaches people about diversification, extolling the importance of spreading out risk. But—and this is an important but—we contend that however well intentioned, Wall Street's version suffers from two major omissions: first, Wall Streeters focus solely on one's financial instruments; second, they cannot model the possibilities of breakdown/breakthrough, so they presume that we will muddle through for the foreseeable future.
These blind spots have led investors to focus nearly all of their attention on investments made within a single zone on the RIM (zone 8: financial assets/global economy). A good financial advisor will ensure that you are diversified within that basket and might even offer advice on real estate (zone 4: tangible assets/close to home), but this is far different from being offered enough baskets to fill the RIM. A more accurate metaphor is a bunch of small dividers (subcategories of types of stocks and bonds) placed within the basket that contains Wall Street's financial instruments.
So instead of following Grandma's wise advice, people are unwittingly using Mark Twain's approach, one that was meant to be a parody! We are putting everything into one large basket, hoping and praying that we don't trip and that nothing bad happens to the global economy, either of which could send our eggs tumbling. This may sound humorous, but it leaves people far more vulnerable than they have been led to believe.
Resilient investing takes the virtue of well-considered asset allocation and applies it to a wider set of holdings. Obviously, there is so much that will not fit in Twain's single container, including all of your personal assets and most of your tangible ones—the very investments that will serve to buoy you through the ups and downs of your financial holdings. We are making the case for creating a truly balanced portfolio that includes much more than you will ever find on a brokerage statement.
And what happens if the future is not simply an extrapolation of muddling through? Wall Street's methods have worked well during many market cycles, but they offer scant protection from systemic risk—the risk of collapse of the overall market, not just a particular company or industry. In financial-speak, another word for systemic risk is undiversifiable risk, which essentially says that there is nothing in the global economy basket that will keep you afloat when the ship goes down.
The recent financial crisis provided a glimpse of what this could look like. Real estate values collapsed, uprooting homeowners who had been lulled into a fantasy world where prices only go up. Bond prices gyrated, as the risk of default by corporations and municipalities rose, causing great distress among older investors who thought they were invested conservatively. Even gold, regarded as a safe haven by many, sank 25 percent during the worst of the 2008 crisis.5 Investors had no place to hide except under the mattress.
Nobody knows when the next shock will hit the financial system, but if there was one lesson to learn, it was that investors need to update their risk management toolbox. We are not willing to accept that there is no way to address systemic risks, and neither should you. A resilient investing plan will enrich your life in today's world while hedging against—or, if you choose, preparing for—the possibility that our fundamental social, economic, and environmental reality could shift in profound ways. Of course, while resilient investing may reduce exposure to systemic risk, we also must remain diligent and conscious of managing (and balancing) the range of specific risks inherent in our actions across the RIM; this is addressed in brief in Resource 2: The Investor's Eye (at the back of the book) and in more detail on ResilientInvestor.com.
Our nine different baskets offer a much wider array of places to entrust your investments. Remember that baskets are one of humanity's oldest inventions—practical, sturdy, beautiful, even (dare we say) resilient containers—and have been put to myriad uses through the ages. As you make your way through the next three chapters, you are bound to realize that you have already been putting some eggs into many of these resilient investing baskets but lacked a framework for seeing how they fit into your overall picture. The RIM helps us be mindful about all of our investments—including those made with our time and attention.
Diversification may not be an elegant term, but it comes from diversify, which means to expand and broaden our horizons. Now it's time to do exactly that, as we escape from the box that limits most investors to mainstream financial offerings. Let's unfold the Resilient Investing Map and set off on our journey of discovery!
More Than Money: Recognizing Your Real Net Worth
Personal, Tangible, and Financial Assets
The Resilient Investing Map invites you to invest in your life in a way that recognizes and grows all of your assets. Indeed the goal of resilient investing is to consciously and methodically spread your time and money around the full RIM to nourish all the elements of your complete "net worth." This will include prudence with your money (financial assets), appreciation of your possessions and the built and natural world (tangible assets), and nourishing your relationships and inner growth (personal assets). SEE FIGURE 2
It may feel a little strange to think of, say, the ways you prioritize activities that enhance your child's well-being and the strategies you are using to manage a brokerage account as being parts of a unified investment system. We're trained to think of these as very different kinds of decisions, but they are indeed related, as both are investments you make to bring about a desired result in the future.
Resilient investing enables you to put all of your goals on the table as you consider where you want to direct your time, attention, and money. Crucially, this approach acknowledges that for most people financial resources are limited. Those who cannot set aside money to invest should realize that they are indeed making investment decisions that are just as important—maybe more so—than those who are fortunate enough to have a brokerage account. At the same time, by looking beyond financial investments, we encourage everyone to diversify their investment horizons to include the equally important tangible and personal realms. The ways you engage and are nourished by your home and your ecosystem, and the crucial roles of your loved ones and the pursuit of your dreams, are at least as important as your portfolio balance.
Let's take a closer look at your real net worth by taking a ramble along the rows of the RIM.
Financial assets, the bottom row of the RIM, are the familiar currency of the realm that we are used to calling "investments." This may include corporate stocks, debt instruments (i.e., bonds) that loan money to governments or corporations, and your short-term savings and checking accounts. Mutual funds, and now exchange-traded funds (ETFs), were created to help ordinary investors diversify their holdings of stocks and bonds. Wall Street also offers more complex instruments, ranging from relatively simple options contracts to a bewildering array of derivatives and bundled risk instruments that most of us, professionals included, would be stretched to comprehend (which is how their creators like it!). Those who have substantial assets or higher incomes may access the world of private investments and hedge funds.
For those who seek a "triple bottom line" (social, environmental, and financial), it has long been possible to select financial assets that align with one's personal values. Most of the above choices are available through sustainable and responsible investing (SRI), and performance has been reliably competitive (see Resource 1: The Case for SRI). In recent years community investing has created many opportunities to bank locally as well as to put some savings into community loan funds that do great work. Opportunities to participate in microfinance in the developing world or to loan your money to programs supporting local food systems are increasing every year, while qualified investors can choose among a wide range of private placement offerings in social enterprises that serve sectors such as education, healthcare, renewable energy, green development, and sustainable agriculture and forestry. (Continues...)
Excerpted from The Resilient Investor by Hal Brill, Michael Kramer, Christopher Peck, Jim Cummings. Copyright © 2015 Natural Investments, LLC. Excerpted by permission of Berrett-Koehler Publishers, Inc..
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