Tuesday, December 30, 2008

Danford's Theory of Investment Relativity

“We’ve lost $60,000 in our various accounts,” explained an agitated friend. “When I think about how long and hard we worked to get that money, it just makes me crazy. We’ll never get that money back in our lifetime.”

I listened, and I hope genuine compassion showed on my face. The truth is that 2008 will be recorded as one of the worst investment years ever. People everywhere are expressing similar thoughts, and who can blame them?

Later, though, a thought occurred that might help my friend sleep better. I wish I’d been quick enough to share it at the time, but fast thinking isn’t always my strength. Often – as in this case - my best thoughts grow from someone else’s seed.

Let’s assume that my friend has a few hundred thousand dollars in investments. Add in the equity value of his real estate, and a couple of nice pensions, and his family net worth is pretty impressive. Enough to put his family on the higher rungs of America’s economic ladder.

And he’s right when he notes that they worked long and hard to get up there. Experience suggests that most folks in the top twenty-five percent are there for precisely that reason. Wealth building takes serious education, effort, teamwork, and patience. (Writer Malcolm Gladwell suggests that a bit of luck helps, too, but that’s a different subject.)

Here’s a surprising insight. It’s easier to stay up there than get up there. Especially regarding investments. Truthfully, there’s more similarity than difference when it comes to investing. Why? Because we’re all in the same boat, sailing on the same stormy sea.

Think about your home. Maybe you paid $200,000 for it and it’s similar to most others in the neighborhood. Along comes a big, old, nasty recession, and housing prices fall. You’re distressed to discover that your house is now worth $175,000. “We lost $25,000,” screams that inner voice. Ouch.

But wait. The same thing also happened to every other house. Does it really matter what the price tag says today if all prices reflect the same adjustment? Sure, if you sold that house today, you’d get less than you paid. But, since the same thing happened everywhere, you’ll also pay less for a different house. Your relative position in the neighborhood or nation hasn’t changed much at all.

My friend’s investment portfolio suffered a similar fate. The overall value dropped ten (or twenty, or thirty) percent, but so did most other’s! And, interestingly, at roughly the same time, and for roughly the same reasons, prices on almost everything else dropped, too.

Skeptical? Check recent listings of real estate. Visit a car lot. Walk through Best Buy or J.C. Penney’s. Seriously, prices have fallen almost across the board. Even a gallon of gasoline has fallen by half in recent months.

So my friend’s relative position hasn’t changed much at all. The numbers are different, but that’s about the only change today. Later, when economic uncertainly abates and investment prices rise again, his numbers will adjust again, too. Simply, he was near the ladders’ top, he stayed near the ladder’s top, and – when things get better again – he’ll still be up there.

Honestly, it’s easier to stay up there than it was to get up there in the first place. Sleep better, my friend.


Dan Danford is founder and CEO of Family Investment Center in St. Joseph, Mis­souri. The firm is a commission-free investment advisor registered with the SEC. Danford and other advisors at the firm specialize in managing large portfolios of traditional investments. They do, however, advise investors on a broad range of wealth management services. More about Danford and this unique firm can be found at http://www.familyinvestmentcenter.com/.