Remember the story of Odysseus the Cunning? A clever strategist and inventor of the Trojan Horse, he left the Trojan War as a hero. According to Homer's "Odyssey," Odysseus expected a quick and easy sail back to Ithaca. Alas, Poseidon, God of the Sea, favored the Trojans, and placed many obstacles between Odysseus and home.
Two of those challenges were Scylla and Charybdis, sea hazards lying close together, blocking the fastest way for Odysseus to return home. Homer described Scylla as a six-headed monster with razor-sharp teeth, lying in wait to leap out of the water and snatch sailors from their ships. Charybdis was a monster with a massive mouth, big enough to suck in all surrounding water to make strong whirlpools. (There's a great illustration here .)
Odysseus, his crew, and his ship were caught between Scylla and Charybdis. Should he sail closer to the monster who would eat his crew, or the monster who would sink his ship?
Odysseus was forced to make a tough choice. He rationalized that it was better to lose six of his crew (one for each of Scylla's heads) than lose his entire ship in the whirlpool. He steered towards Scylla, lost shipmates, but made it past the monsters.
What's the connection between Greek mythology and financial planning? Sometimes investors have to choose between the lesser of two evils, just as Odysseus did.
We've all seen that because interest rates are so low, many investments that guarantee principal pay very little in interest. Savings accounts, checking accounts, money market funds, and certificates of deposit provide a negligible return.
On the other hand, riskier investments that historically provide growth have all suffered beatings over the last decade. Real estate, commodities, and stocks have all taken hits as the economic waters ebbed and flowed around them. What's an investor to do?
The answer is to make the same choice as Odysseus: if you're stuck between the devil and the deep blue sea, keep a calm head, weigh your options, and make the least bad choice.
If you need money over the next few years, lower-risk investments are your least bad choice, even with a low yield. The danger of losing your principal outweighs the danger of low earnings.
If you don't need money for many years, higher-risk investments (real estate, commodities, stocks) are your least bad choice, even with their added risk. The danger of inflation (as prices of goods and services rise over time) outweighs the danger of losing money in a bad year.
As a general rule, the longer until you'll need money, the more risk you can take with it. While no one wants to take on unneeded risk, you can exercise some degree of control, and choose which type of risk to assume. Be as clever as Odysseus, and choose risk's least bad form.
Lou Dagen is a Certified Financial Planner in the San Francisco Bay Area. For twenty-three years, he has helped clients around the world retire in comfort, educate their children, and increase their net worth. If you have comments or questions about this blog, please post in the "Comments" section below, or call Lou directly at 925-997-8507.
What can we learn about financial planning from that part of Odysseus' life?
Lou: Your story is like the one by El-erian, the CEO of PIMCO in which he says on extended business trips, he runs out of clean shirts and had to take the least bad one available. He uses that as an analogy to the current selection of investment choices. He manages about 2 trillion dollars so I guess people like stories about shirts better than mythology, but I liked your story. The choices we have right now are not very good and seem to be artificially manipulated by the Federal Reserve. So, its rather difficult to determine future returns. At least for me.
Ouch! I was not inferring that people in the finance world were ignorant. Since Lou made an interesting comparison between modern finances and an ancient Greek legend, I was simply wondering if Odysseus' entire adventure and how it ended up had any similarities. Nothing more; nothing less.
There may be some out there with MBA's, but those are few and far between from what I have seen, with most MBA's usually going for a JD specializing in Business Law, Patent Law and even Corporate Law so they can be Licensed Attorneys or Legal Counsel. What may set them apart, though is the licenses they may hold, like the FINRA (NASD) licenses that a professional may possess. If a Financial Professional holds a Series 7 license from FINRA, it probably means that professional can talk to you about stocks and even sell them to you. If a Financial Professional holds a Series 6 license, it probably means that the professional sells and trades in Bonds and Annuities and one may find a few Insurance Agents and Brokers with this license. If a Financial Professional holds a Series 3 license, the professional works with commodities like precious metals and natural resources and may sell futures in those. And besides the FINRA licensed professionals, there are also the NAEA licensed professionals, such as the Enrolled Agent that you may find many CPA's holding, meaning that these folks can represent you as a client before the IRS and FTB should you wind up being audited and are good folks to have around when one has tax problems.
Having worked as a financial advisor for a few years, and having spent years being an observer of the financial meltdown -- brought about by the wunderkind of the financial markets -- I find this statement laughable. Many have no ethics, other than what will make them the most money -- not what will actually serve their clients' interests. Most are no smarter than you or I -- hence the financial catastrophe brought about by the collaterized debt obligations and so many other things.