For those of you who follow sports as well as investing, you probably crossed path with the news item last week that Denver Broncos owner Pat Bowlen is stepping down after the revelation that he has been battling Alzheimer’s for the past several years.
That naturally triggers a discussion of the most uncomfortable topic in investing: What is a self-directed investor to do upon receiving notice that he will be gradually losing his cognitive functions, and must plan accordingly?
It’s a complex discussion, and often the investment portfolio gets put on the back burner (when you’re wondering what it will be like for your wife of fifty years to deal with you not recognizing her anymore, or what it will be like for your children to continue growing up with a father who is there in but not in mind, you may not get around to figuring out what to do with those 10,000 shares of Altria, or whatever the portfolio may be).
What I find unusual, though, is that most discussions of what to do with the portfolio of someone affected by Alzheimer’s (or some other gradual mental impairment) tends to focus on who should be given the keys to the portfolio, with “who” usually being a singular.
I’ve never understood why many investors faced with the prospect of turning over their portfolio to a third party feel an obligation to give the entirety of their earthly wealth to only one individual. Generally, one of the reasons why someone becomes a self-directed investor in the first place is because he has a healthy distrust of portfolio managers (regardless of whether this perception is fair or not), and it would seem wise to split a portfolio up among two, three, maybe even four different firms as a safeguard against one individual firm’s potential ability to destroy wealth, be it from fraud or mere lousy investments.
If you’re sitting on a $1,000,000 nest egg and you’re rapidly approaching a point at which you can no longer oversee the investments, why not divide that money into four piles of $250,000 and permit four different firms to monitor the funds and be responsible for sending income your way, either from interest, rents, and dividends alone or from selling shares as well?
The downside is that this involves quadrupling the paperwork and increasing the amount of fees paid by your nest egg, but it is diversification that comes with a benefit. When you are facing a time-clock until you must outsource your portfolio to someone else, the objective isn’t trying to optimize total returns anymore, but protect what you have and create safeguards against being swindled by an unscrupulous manager seeking to capitalize on your mental decline.
This is the stage at which you move your assets to index funds and give instructions such as “don’t sell anything, only give me the income”, although it’s entirely possible you’d want to hold onto some individual stocks such as Exxon (XOM), General Mills (GIS), and Colgate-Palmolive (CL) that have built up large capital gains in a taxable account, and given their histories of paying out dividends since at least the 1890s, you might want to take your chances that those companies will keep doing their thing even after you are no longer in a position to monitor them (for the argument against this approach, take a stroll through google to read the stories of children that inherit trust funds stuffed exclusively with General Motors stock which crumbled to nearly nothing during the financial crisis).
When you read articles on Seeking Alpha, a common theme that is often mentioned is diversification. Diversification of income streams, in some cases diversification of asset classes, and sometimes even the diversification of brokerage houses. For investors that have received news that they are in a state of mental decline, it seems wise to seek diversification of people when it comes to outsourcing your portfolio.
If you only choose one advisor, there’s no checks and balances system in place to provide you protection against his misconduct. If you split your money into four accounts, you’ve diluted your advisor’s potential malfeasance by 75% in the event that he makes bad decisions with your money. The conventional wisdom seems to be that finding one reputable firm and letting them manage your money is enough, but given the stakes (this is 100% of your earthly wealth that you can no longer effectively monitor), it would seem intelligent to divide the money up among different portfolio managers to reduce the probability of empowering one person to go off on a frolic of his own with your money while you are helpless to stop it.