By Brad Thomason, CPA
Is there, at the present moment, any word in the English language more over-used than ‘sustainable?’
How did it become the favored descriptor, delivered with a certain reverence (and even breathlessness), of well-intentioned thirty-somethings who have not yet realized that in five or ten years they too will think that their younger selves were a little ridiculous? I ask you, does any school-aged child ever declare a desire to grow up to be a caricature? But I digress.
People talk about everything under the sun (and the harnessing of its rays as well…) in terms of sustainability. Which is damn inconvenient, because if you want to talk about something that people can keep on doing for a long time out into the future, there’s not really a better term; but to use it now makes you sound like one of them.
Oh well, first-world problem, I suppose.
In any event, sustainability is something investors ought to think about, especially when it comes to the kinds of returns you’re getting. We’ve already discussed that getting double-digit returns year after year from a basic stock account is probably not something you should expect. But there are more subtle forms of the sustainability question, especially for those who have had, or still take, an active hand in managing their own money.
Here’s the set up to a conversation I’ve had many times in the past. You’ve got a guy who owns a business, or has had some success as a trader, or does high-yield debt deals, or is maybe some sort of real estate operator. In other words, a person who clearly understands about deploying capital and making more capital as a result. He’s rocking along, earning a higher rate of return than your typical investor, he has (often rightly) a sense of if-it-ain’t-broke-don’t fix-it, and you (me) are trying to convince him to scale back on the activity, move some or all of the money to something else, and in so doing sign up for a return that is most likely less.
You can see why that would be a tough sell.
Now, the reasons behind the conversation are quite legitimate. First, there’s almost always a diversification aspect to the situation. People who are one-trick ponies (especially when it’s a good trick) almost inevitably have concentrations of capital in just one or two asset classes. Every day that ticks by you get one day closer to needing retirement income, and so a serious imbalance becomes that much more of an issue each passing day.
That’s a very theoretical argument, and usually carries about as much weight as you would expect. I mean reading through that last paragraph just now, even if you agreed with the central idea, did you really feel a strong motivation to act? I didn’t think so.
So then you move on to the practical argument. Which is a little tougher to squirm away from.
People who actively manage capital can make more money than passive investors. To me, that seems perfectly reasonable, as one could attribute part of the return to the deployment of capital, and the other part to compensation for effort expended. But people who actively manage capital are plate spinners. And should the day come that they can’t keep the plates spinning – due to a sudden illness, or even something more permanent – then who tends the plates?
Sooner or later we all need to retreat to more passive management. That most likely means cutting back on the transaction or activity which has been so good to you in the past. It also most likely means that overall return levels will drop. Neither of which sounds so great. But you have to consider the alternative: if you build some elaborate portfolio that no one can effectively manage but you, and all of the sudden you aren’t there anymore, you haven’t done anyone any favors.
You may have a lot of wealth on paper, but good luck to your poor family trying to unwind everything in a manner that preserves all of that wealth and converts it into usable form. It might have been perfectly reasonable to be single-minded in your 50s and 60s. But as you get older, along with so many other things, that changes.
That’s why you ultimately agree to the lower return. Well, that and the reduction in basic risk. In other words, you make the switch because what you were doing isn’t sustainable. Since it is going to come to an end someday regardless of what you would like to see happen, anyway, isn’t it better that you are the one to shepherd it through the process?
It sure can be a pain to realize that the case for doing something you really don’t want to do is pretty solid. But there you have it. If you are enjoying the benefits of unsustainable returns, please give some thought to when you need to start transitioning away from them, so you don’t leave a big mess for someone else to have to try to clean up. Especially if you already have what you are going to need, risking the win for extra that you don’t need is already a tough enough idea to accept; that much more so if the risk is also accompanied by a big list of chores.
Can the kinds of returns you are getting now keep going year after year, maybe for decades out into the future? If not, have you thought about what you should do about that? Probably you are going to keep spending money. It has to come from somewhere, preferably somewhere… (grrrr) sustainable.
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