The Hero’s Journey of the Family Investor

Successful family investing is a journey full of ups and downs - a path remarkably well described by the classic “Hero’s Journey” story structure.

We’ve supported many families on this journey – and have come to understand how important it is to set reasonable expectations.

Happiness - and the comfort and confidence that comes with it - is usually proportional to our level of acceptance and inversely proportional to our expectations. ¹

If we can support families from the moment we meet them in setting reasonable expectations for their journeys as investors (which will usually be very different than their journeys as wealth creators) and check in with them on their expectations along the way, we will be doing them a great service - and maximizing their likelihood of investing success.

And before we dive into the description of the investor’s journey, we need to keep a couple of related ideas in mind:² ‍

1. The degree of emotion/comfort/confidence people feel throughout their investment journey depends on their experiences with money and investing – especially as young adults – so we need to dig into and be mindful of this.

2. Making money is about risk, optimism, and courage – keeping money is entirely different – it’s about the fear that everything you’ve made could be taken away. Staying rich also requires humility, recognizing the role of luck (good and bad) in life, and focusing more on the investment process than individual investments – not easy!

And now, a description of the journey that many of our client families take with us:

The promise

The family investor (our hero!) often begins with the status quo: traditional firms and traditional asset classes - ordinary, mundane, and too often, volatile and disappointing. Our hero decides they need more/must do better – so they begin to explore their options – there must be a better way...

Taking the leap

This promise involves new people to trust, different approaches, new asset classes, and investment strategies our hero has never heard of. Building a widely diversified and institutional quality portfolio feels daunting and unsettling! Fortunately, a mentor helps our hero by providing experience, perspective, wisdom, alignment, training, the needed pushes - and confidence – which results in a commitment to the journey – and execution of the first few investments on this new path.

Turbulence

Our hero encounters many tests along the way. The new strategies sounded so intriguing – the research reports so thoughtfully written – and the investment managers so confident and eloquent. But alas, some of them are underperforming so far. Has our hero made the wrong decision? Is this the right path? How much time is needed for this to work anyway? Broad diversification sounded like such a terrific idea – but some of this stuff just does not feel like it is working (the definition of diversification – more on this below). And the paperwork! And the capital calls! Despite the assurances and support of the mentor, our hero wonders if she would be better off back in the ordinary investment world…

Second Guessing

Our hero may be feeling uncomfortable – her natural biases (both cognitive and emotional) may be causing real discomfort and skepticism. Should she stick with it? “I’m now three years into this, and the performance hasn’t been what I’d hoped. I’ve done a lot of work to get here and followed my mentor’s advice – though I cannot help but wonder if I’ve made a mistake. My brother’s portfolio is soaring right now – I know it’s not nearly as well diversified as mine – and has a lot of technology stocks – but maybe I should be doing more of that…”

Initial Rewards

“Wait… some of the private equity investments we made three years ago are starting to return capital. A few of the real estate investments have refinanced and made meaningful distributions. This is starting to feel good! Maybe this will work…!” “But hold on - while many of the strategies I’ve invested in are doing well, a few have not done well this year. Shouldn’t we sell them? I know that we’re maxed out on our target allocation to equities, but the tech stocks are doing so well – shouldn’t we sell that credit strategy that’s been underperforming and buy some tech stocks?”

Redemption

And then it happens - equity markets are off 5% - then 10% - then 20% - they are now off 30%.  “My brother is freaking! And I’m not... Yeah, it doesn’t feel great that my allocation to equities is off this much, but most of my diversifying strategies are holding up. And while I know that if my private investment managers had to sell their portfolios today, they’d be hurt – but they don’t. Those investments will continue to be harvested over time when it makes sense to do so, and perhaps even offer comforting cash flows along the way.

I’m starting to feel a calm settle over me – that all of this work and the seeds I’ve planted have grown into a solid and well-thought-out portfolio. I don’t have to worry about technology stocks – or whatever the next big thing is – or isn’t…”

“And yes, some strategies continue to underperform – though others outperform. And for the first time, I begin to understand what thoughtful and comprehensive diversification is all about – I own a wide range of different strategies that are managed by capable, thoughtful, and experienced people. And while my advisor and I expect them to work over time, none of them are likely to perform well all the time – and if they did, my portfolio would not actually be diversified. So, by definition, being truly diversified requires that I be constantly disappointed with pockets of the portfolio – though with the calming expectation that these pockets will take the oar when others have exhausted themselves.”

Peace of Mind

Peace of mind comes with a thoughtful, comprehensive, and well-executed investment process – the calm and patience that settles in when you know you have done the work required to build and maintain the portfolio – and the wisdom to let go when you feel the urge to stray from your plan. And the investment results are there – on an absolute basis – and even more so on a risk-adjusted basis – which supports the sense of calm.

Eventually, you learn that no matter how appealing all those stories of investment glory are, nobody knows what the future holds nor what the next hot investment will be. So you stand firmly on the foundation of your well-defined investment plan, continue the work to maintain it, and let the future throw at you what it will.