The Fallacy of Chasing Market Returns – Part 2

A formula for not chasing after market returns…[ecae_button]

So the last post, we began discussing the extreme fallacy in trying to beat the markets.  Although I believe it is truly a fool’s errand, I won’t spend as much time or words ranting and pontificating (so you can thank me later!) in this post.  Today will be spent giving you what you should be doing or at least thinking about.  As always, these are merely suggestions.  Any advice I give you here should be considered in context of your entire financial plan, so be sure you consult with a financial professional prior to implementing anything.

 Leave behind the days of “in and out” of the market. 

One of the more insightful quotes of Sir John Templeton was when he said,

“The best time to invest is when you have money.  This is because history suggests it is not timing which matters, but time”.

Now, who are you and I to question one of the most successful investors of all-time?  Let’s explore his perspective because there is a simple wisdom behind what he says.  Googling Sir John’s history is helpful, because it will uncover that he and his family survived some of the worst times in US economic history.  Despite the struggle his outlook remained positive.  My observation in all my years of helping individuals invest their money is that, rarely is the focus not on the myopic goal of beating the market.  Sir John’s simple wisdom suggests a singular focus,  but on something much more valuable than the money we invest—it is time.  All around us we see the result that time has on nature (probably the most profound of all) and in all aspects of our lives.  And although we all learn the lesson of compounding interest from books like The Richest Man in Babylon or the lesson of discipline and frugality from The Millionaire Next Door those lessons are not applied.  Whereas, if the average investor spent less than he or she made, invested 15-20% of their gross income in low cost funds into a qualified retirement plan, he or she would have accumulated a tremendous amount of capital to live on throughout retirement.  However, more often than not, news and print media panic individuals into buying and selling their investments far too often incurring fees and taxes that erode their investment capital leaving them frustrated and effectively poorer.  My simple suggestion is to let time be your ally.  If you are in your 20s and you are reading this, good for you.  You can literally start a savings discipline that could last the better part of 40 years and the older you will thank the younger you for it, trust me.  For those of us that are older, we can still start with the caveat of less time, but hopefully with enough wisdom not to repeat foolish mistakes of the past.

Diversify not just across asset classes, but goals. 

If I have mentioned it before, it deserves another mention, I consider The Aspirational Investor by Ashvin Chhabra a must-read for the DIY investor.  If you consider yourself smarter than the average bear based on your current portfolio, please do yourself a favor and pick it up. He establishes a good foundation for how investing should be broadened to include our life goals and not just the pursuit of better than market returns.  I think he uncovers something key and it leads to my next suggestion.  Finding more contentment in your life will be the key to increasing your net worth (and thus your wealth).  We all see the struggles that some “wealthy” people have and wonder why their money doesn’t bring more happiness in their life.  This is because wealth does not bring happiness to you unless you are already content.  Contentment has to do with understanding that what you value and what you believe is worth more than just money.  This inevitably leads to finding ways to use your money to promote your values and what you believe in.  This is the “quan”, as it were, that Cuba Gooding, Jr. mentions in the movie Jerry Maguire.  In the movie, although he chases the big contract, Cuba’s character realizes it means nothing without his values and the people he loves around him to enjoy it ( (his “quan”).  This realization hits Tom Cruise’s character also when he realizes that what he values is not the chase of being this hot shot agent, but being there for people.  This becomes his source of true contentment. (Pardon my Rotten Tomatoes review!)  What’s my point?  Understand what you value, then use your money for those things.  This will lead to financial contentment, which will inevitably lead to increasing your net worth.  All of which have nothing to do with beating the market.

The Fallacy of Chasing Market Returns – Part 1

In the classic movie, The Wizard of Oz, there is the memorable scene that has the wizard being revealed as the small little man that he is. By this time though, Dorothy et. al. have gone through enough trials to have confidence in dealing with a “bully” as it were. The quote that I’m referencing is, “pay no attention to the man that’s behind the curtain”. And although I rarely do this, I’m going to give you the punchline of this blog right up front. Resist the urge to try to keep up with the markets. There you have it. I am proverbially “dropping the mic”, and exiting stage left. (For those of you that want just a little more, read on.)

As a veteran of the industry, I feel I should justify my position. After all, I ran a municipal trading desk for nearly five years and booked annualized returns of 7%, so I’m not talking out the side of my face. For years though, I felt the elixir that the financial markets was drinking seemed too good to be true.  And regardless of my gloating a few sentences ago, I realized then (and am acutely aware of now) that I was not the smartest guy in the room, so I often spent time asking [a lot of] questions of a lot of people. The majority of them echoed the same sentiment…”things are weird out there”. They meant in both the bond and equity markets. (I realize there are more asset classes than just those two, but they cover most of what retail investors have to choose from.) So that led me to evaluate what was so weird….

# 1 Weird thing…Equity markets have gone up [way] more than corporate profits.

So you might say, Dominique, this will always happen because investors look at P/E ratios and are essentially willing to pay for earnings that have yet to happen. But let me warn you, there’s a reason that “past performance is no guarantee of future results”.  So here are some facts for you.  Per the Shiller PE ratio, the market trades at an average 16x multiple, although it is currently at 27x.  Also, understand that on average, and a fairly recent average (e.g. 1984-2014), equity markets returned 10%.  So here comes the weird…I began to realize that nearly every investor, especially those with most of their investable net worth in company retirement plans: a) rarely has the option of building a fully diversified portfolio (more on that later), or b) has the discipline to stick with an investment strategy for more than one market cycle. So let me address two major issues that I just ran past. The first is that the market by nearly any estimation is overpriced as it relates to actual corporate earnings.  Next, is the lack of “real” choice in 401(k) plans combined with investor psychology. I’ve written previously on corporate profits and market valuations here, but the refresher course is that corporate profits have actually appreciated about 38% (since about July 2008, whereas equity markets [measured by the S&P 500] have appreciated about 87%.  Could it be that 401(k) deposits are pushing the market higher instead of corporate earnings? Quite possibly.  This wide variance can also be attributed to the result of a lot of stock buybacks by corporations due to the relatively inexpensive carry trade. Corporations have used the low-interest rate environment as an opportunity to issue debt at phenomenally low rates and use the tax shield provided by the interest deduction to lower their tax rates. This concoction allows company XYZ to raise a lot of cheap funds by issuing bonds while using the cash to buy their stock.  More buyers of stock, raises the price and begins to inflate valuations. Next point. Defined contribution retirement plans force most participants into a “long-only” [mostly equity] position regardless of their risk tolerance and time horizon with a menu of 10-15 funds (and I’m being generous). I’ve looked through several 401(k) plans and have been left scratching my head at the dilemma for plan participants.  And if after you finally decide on an allocation, then you get to read and hear all the “doom and gloom” of BREXIT, China’s economic implosion, Japanese helicopter money and the like.  The majority of investors are thrown into a panic in which they end up selling too low and buying back in too high. This is the reason that while the S&P 500 averaged 10% from 1984-2014, the average investor only made 3%.

#2 Weird thing…Short interest is high in equities and bonds.  

The smart money (as it is sometimes called) has seen the trends I’ve named above for years now and have promptly taken the other side of the trade.  So if not smart, definitely enterprising.  As Mr. Ray Dalio says, “if you’re at the poker table wondering who the sucker is, then it’s probably you”.  This crass use of Ray’s words will hopefully help me bring home a point I intend as a gut punch to all individual investors reading this blog right now.  There is a grand fallacy in trying to beat the market. Between all the computer programs that trade markets in hundredths of a second, and the mountain of institutional cash out there with access to up-to-date information, the average investor is up to an insurmountable task in trying to beat market returns. The collective market is hard to beat.  Then, why should you?  Before I answer that…I was saying, the smart money has taken the other side of the trade and sold short a lot of what the average investor might be buying in the company 401(k). Sorry if this was a big secret to you, but it is happening. I recently was reading that this year has only seen 5 weeks of positive equity fund flows, but yet the market is up 6% as of this writing. Well how is the market still going up in the face of so much selling? This is when it helps to realize that the buying that is taking place is actually the covering of short positions. How much short covering? A lot.

So what does all this mean? It means that trading in your 401(k)—regardless of how large it is—is up against a huge wall of money going the opposite way “in trend”. Which means that if you try to keep up with beating the market you might wind up feeling like the carpet has been pulled from beneath you before long. This necessitates you looking at your investment strategy totally different and with a disciplined perspective—not a in and out mentality.

#3 Weird thing……Low interest rates.

Now, low-interest rates are not exclusively weird since there has been precedent. Also, easy money policy or low-interest rate policy (“LIRP”) serves to induce spending to stimulate an economy and keep it from deflation. Trust me, when choosing between deflation or inflation you want inflation—see Japan. So, my point is that this is not a discussion on whether or not interest rates are artificially low (they are) or that the government is printing too much money (who cares). I want you to take a look at the macro picture which I feel is really the only thing that matters.  Think of the US Central Bank’s current monetary policy as potentially disruptive to global economic growth, since many countries are still attempting to recover from the 2007-2008 financial crisis. Most economies abroad are still having problems growing GDP (as are we). Let me back into the explanation….a country can’t raise its interest rates as long as growth is stalling. So instead, they lower interest rates to induce spending (and spur growth).  But what can happen as a result? First, your currency can depreciate which is not all bad because it can give you a competitive advantage with [relatively] cheaper goods to sell.  However, there are other ramifications to consider.  Alternatively (or co-currently), lower interest rates can drive investment capital offshore to higher interest rate economies.  Since capital generally seeks the highest return, this has been seen in some emerging economies.  This can dovetail into eroding the competitive edge gained by currency depreciation and cheaper goods.  The eroding effect happens when the foreign capital headed for “greener pastures” is due to be paid back in a devalued currency.  Quite literally, the cheap currency has bought an advantage that they can’t capitalize on because the interest and principal due on the foreign loans is much more than what was borrowed.  Ideally, a depreciated currency would have stimulated enough economic activity for the foreign capital to remain in the economy.

The fallacy of chasing market returns graphic

However, other factors in an interdependent global economy don’t allow for the ideal all the time.  A recent example of this was the commodity panic in 2015 on the back of lower oil prices.  Only the strongest of emerging economies have survived the revaluation of their currencies.This is what I feel is the most alarming about global economics and another reason why I maintain that the US is still the “cleanest dirty shirt”.

So what do I suggest? Well, that will have to be saved for part 2 because after nearly 2 decades in the industry I feel there is a way to overcome this market weirdness, but it has nothing to do with trying to beat the market.

(TO BE CONTINUED)

Could the NFLPA be Doing More to Prevent Fraud Among Athletes?

Is it possible that the NFLPA can be doing more to prevent fraud to their athletes?

My last article covered some specific things that athlete-clients can look for when seeking to hire a financial professional.  Having had some conversations with former players, journalists and a league insider in the time since, I decided to continue the theme and focus on some things that the NFL Player’s Association (NFLPA) could do to prevent some of the instances of fraud that are happening to athletes.  Now I will say, my tone may seem harsh and I haven’t sought comment by them on this subject, but these are things of which they are well aware.  So the question is naturally:  “With a multi-billion dollar per year enterprise like the NFL, couldn’t the union be doing more to help prevent fraud against athletes?” My opinion is simply yes,  and here’s why I think they could (and should) be doing more.

Credibility–That’s the Problem

In theory, most advisors want to work with affluent clients like athletes and other high-net worth individuals. But in a survey taken not so long ago, the NFLPA saw a decline in the number of financial advisers applying for certification. Very possibly, this could be tied to the trend of overall decline in the industry and aging demographics, or something else.  Although it is possible, it doesn’t seem likely, having witnessed these trends (first-hand) in financial services for nearly two decades.  Therefore, I have to ask the question: “why wouldn’t advisors want to join the NFLPA program and what could be some of the reasons?”  On one hand, you could argue that older advisors leaving the industry makes room for successions and younger advisors to enter, thereby creating more “room at the table” for advisors looking to work with athletes in the NFL.  Also consider, financial advisors are looking for good, long-term clients.  At the end of the day, advisors have to eat also, and it doesn’t make for a good use of time to market in a place you are not welcomed.  So you have to wonder, how has the NFLPA prepared athletes to interact with financial advisors?  Neil Stratton, a league insider, publishes a pretty informative newsletter that revealed the following last November in a NFLPA event designed to address “concerns of members of its financial advisor program”.
He mentioned the following from various participants in the webinar:
“…unfortunately most players do not care whether or not an advisor is registered with the NFLPA.  The union is not going to help [advisors] meet players in any way, shape or form”.
“…as far as I am concerned….the FA program is a colossal waste of time and money…I have wasted plenty of time and money traveling to their symposiums and have never left one wiser.”
“I just didn’t really get a sense from the webinar of anything specific that will be done differently or additionally to promote (a player-centric approach).”
Stratton concludes by asking the question:  “if the NFLPA is serious about putting competent financial counsel with its players, and its vetting members of the program sufficiently, why aren’t members of the program invited to the annual Rookie Premiere and given audience with the players?”  I agree.  At some point, don’t you have to justify the annual dues and non-refundable fees you require advisors to pay (“to play”) and use that to make the program better?  Wouldn’t this attract competent advisors into the program and help weed out the charlatans? Is it fair to say that an organization with a payroll far in excess of $15 million per year which includes a handful of lawyers should be able to create a vetting process to keep advisors that lie about their credentials out of the program?

Where’s the Accountability?

As cited several times in this article, the NFLPA’s Rules and Regulations for financial advisors punts most of the oversight responsibility back to the advisor or the firm he or she is working for.   A SEC No action Letter from 2002, deemed the NFLPA’s program as “not giving advice” which falls under much less onerous rules (as veteran financial advisors well know).  Yet it acts as the “gatekeeper” of sorts to allow financial advisors that do “give advice” access to players.  Was the program designed to escape SEC oversight and just provide access to players without any further accountability?  On their website, the NFLPA publishes the requirements for certification in the Regulations and Code of Conduct.  Let’s look at a sampling of the language.

Obligations of the Applicant FirmThis clause basically shifts the responsibility of oversight back to the applying firm based on the regulatory authority’s requirement.  Couldn’t the NFLPA just develop more stringent oversight and rules in the interest of its own players realizing that they are often targets because of the program’s “relaxed” standards?

Professional Qualifications– This clause lists all of the professional qualifications for advisers entering the program.  But who checks on these qualifications?  A more thorough check with state securities regulators would have revealed that Mr. Ash Narayan was not a CPA.

A Registered Player Financial Advisor mustThis clause is really alarming.  So in the case of Mark Sanchez, what was the NFLPA waiting on to realize his investments were losing money?  Weren’t they looking at the statements per this clause? Or was the advisor just not submitting the statements?  Either way, this should have been a red flag to the NFLPA.

Like a began this article with saying, I didn’t reach out to the NFLPA for any comments, so maybe there is another side to this story. But in my years of dealing with non-athlete clients, I’ve noticed something that really bothers me.  Very crucial, accessible information is just not being shared, and you have to ask the question “why”.  Thanks to individuals like Marcus Ogden and Bart Scott, players are being educated on the right things to do, but there is a big hole and we need more shovels. Good financial advisors are hard-working individuals looking to help others reach their goals and dreams.  It seems at least for now, that the NFLPA is just content with “sitting on the sidelines” instead of partnering with us to make things better.

Let “Un-Common” Sense Prevail

Sometimes I allow my mind to wander on topics such as, if different successful personalities were able to implement some of their strategies for our nation or the economy as a whole.  For example, what if Congress were required to exemplify the financial discipline Dave Ramsey espouses?  Or , what if all defined-benefit plans were converted to defined contribution plans with Ray Dalio’s “All-Weather” strategy?  Or what if the MD&A (management’s discussion and analysis) required by the SEC in financial statement disclosures used the same vernacular as Warren Buffett’s plain-vanilla, conventional wisdom shareholder letters?  In my opinion, these are just fun things to think about as I contemplate alternative outcomes and consider other perspectives.

I have taken some excerpts from the last time I listened or read all three of these guys and thought I would suggest one takeaway from what seems to be “unconventional” conventional wisdom and apply to investment strategy.  Here is what I came up with:

From Mr. Ramsey….

Just in case you are not familiar with his show format, he answers calls on air from all types of people.  The calls represent a good sample of the American population that have a similar message:  “how do I get ahead”.  Ramsey’s message is:  human capital is your greatest asset and wealth-building vehicle, so maximize it by delaying gratification and staying out of debt.  It is very simple.  I find it difficult to believe this simple principle could not be applied to the US budget by our Congress. But then again, absent from Mr. Ramsey’s strategies are entitlement and laziness.  These are two elements that will destroy any disciplined plan quickly.  One of his mantras, “live like no else, so later you can live like no else” has the making of something ethereal instead of practical, but yet it is.  One can only fix the problem of overspending (either personally or nationally) when you spend no more than you make.  The Ramsey mindset does not allow any tolerance for consumption beyond your means. Why?  Because eventually, the consumption for which you cannot pay for today becomes a future liability for which you will have to set aside future earnings to pay for which will decrease the amount you have to invest.

TAKEAWAY FOR INVESTMENT STRATEGY:  Over consumption: 1) decreases one’s ability to maximize their human capital through investment and 2) increases your chance to accumulate debt.

From Mr. Buffett…

In my opinion, nothing is more refreshing than his transparency and plain talk.  Most financial disclosures I read are fraught with industry-specific terms seemingly designed to hide something from the reader.  Buffett’s words portray an honesty that makes what he is writing “trustworthy”.  Since he understands his investments so well, he explains what he is doing very well.  It probably follows that if you think you understand something but cannot explain it to someone else, you probably don’t know it that well. (smile!) Berkshire Hathaway’s investment philosophy is leaping off the page to the reader and it is “to increase intrinsic value”.  Intrinsic.  Now there’s a word you don’t hear every day.  But this is just like Buffett to use a term from fundamental financial analysis to arrive at a comprehensible message to investors.  I think the message is that when you invest, find a way to maximize cash flow through income earned.  Investment earnings will provide current income to reinvest and thus increase the [intrinsic] value of the enterprise.

TAKEAWAY FOR INVESTMENT STRATEGY:    Focus on the simplest tenet of investing…making money.  Invest in assets that provide current income with the potential to increase in value.  But here’s the caveat:  “If you don’t understand it, don’t invest in it.”

From Mr. Dalio…

In all the interviews I have read or listened to there is one consistent message with Ray…radical honesty.  Although this seems more of a moral boundary than anything, it has proved very useful from a business standpoint.  For Bridgewater Associates, it has been a guiding light to understanding truth.  It allows them to question things that seem to be hidden in “gray” areas and uncover what really underlies their motivations for making a decision.  Not only has this proved successful from a business standpoint, it has helped to build an enviable corporate culture that few have been able to follow successfully.   As the world’s largest hedge fund, they manage approximately $120 billion and have outperformed most investment strategies handily including the S&P 500.  (Just Google their track record).  Pushing one’s self to a modicum of excellence for the sake of delivering superior results can [and should] be everyone’s goal.

TAKEAWAY FOR INVESTMENT STRATEGY:   Always seek alternative perspectives and better ideas than your own.  Don’t be afraid to question what you think you know.

Invest wisely!

My Letter to the “Future” All-Stars

Are you headed to the big leagues? Here are some things you need to know!

Ray Dalio (one of the most respected and influential investors of our time) says that if you’ve been at the poker table a while and you still don’t know who the sucker is—it’s you.  There’s a lot of truth in Ray’s words.  Due to my passion to spread financial literacy across each demographic I thought I would write an open letter to a class of individuals that can make a real difference with your gift—professional athletes.  As a professional athlete with access to what seems to be a “lottery ticket” to most, I implore you to take advantage of this opportunity and don’t squander it as so many have before.  However, I would like to suggest a slightly different perspective than what you probably have been accustomed to taking.  First, think of each professional sports league as a funnel for billions of dollars that is orchestrated by several powerful owners groups.  Then I want you to understand that they have used planning to get to this point and will be billionaires for a long time after your career is over.  Next, consider that their wealth may have started in generations before them and will possibly continue for generations after (e.g. their children’s children).  It is a game of sorts that is being played by some very smart individuals.  But think of your potential if you were to employ some of the principles they have used to get you to where you want to go.  Could you learn the game?  Sure you could.  No doubt about it.  However, you are going to need some help.  After working for years in the financial industry and with hundreds of client families I have decided to share some of the knowledge and expertise that will get you there.   Why?  Because I don’t want you to be, as Ray calls it… THE SUCKER!

Why Am I Doing This & What is the Game

One of my most heart-felt missions in life is to be a maven of information. In Malcolm Gladwell’s book, The Tipping Point, he suggests mavens can best be described as “people we rely upon to connect us with new information” or “information specialists”.  That said, I find it really interesting that most professional athletes don’t realize the financial “game” being played in their respective sports. What is the financial game? It is the lucrative machine that each sports league greases when advertising budgets are increased every year to promote and endorse a brand that benefits a select minority. Now don’t get me wrong, I’m not a hater. I just think it quite ironic that long after you hang up your cleats or sneakers there will be a rich owner anxiously awaiting the next “you” to emerge from college and dawn the team uniform. But in exchange you get a very nice paycheck (in most instances) and what else? Do you get any other things of value? I mean are your best interests actually looked out for? Look. I applaud every franchise that is taking care of their players (as they should), but there are a lot that are not. I’m advocating that a strong focus be placed on the athlete’s best interests by who else but YOU! Owners are looking for a return on their investment because they assume a businessman’s risk when investing in a franchise, now it is your turn. Enough with the stories and documentaries chronicling the woes of players, deals gone bad, bankruptcies…it’s time to change this trend!

How can you change the trend? Develop Your Own “HPT”

Look, you have earned the right to play on the field or the court through hours and hours of hard work. You have overcome various odds and obstacles. There are only a handful of elites that can even make it to the big time like you have. On top of all the hard work it took to get there, you then have to maintain that level of performance and improve upon it. What do you think the chances are that you can continue that level of performance to stay competitive in your sport AND learn the ends and outs of this financial “game”? If you think they are low you are right. To put it bluntly, you need professional help. Have you considered that the owner of your franchise likely has a team of attorneys, consultants, strategists, CPAs, etc. to advise him about the direction of his financial enterprises—including the team that you play on. He has a “high-powered team” (“HPT”) to handle these affairs. What about your HPT?

Here are the players that should be on your team:

The Agent – This individual has probably been in your life for quite some time at this point. He may have been introduced to you by one of your trusted childhood coaches. Maybe this individual sought you out and the relationship began there. It really does not matter; he or she is a trusted advisor whose main responsibility is to make sure you are receiving market value for your services to the franchise.

The Financial Advisor – This individual may be brought in after the agent is hired. Ideally, the agent has a network of financial advisors he has worked with previously that he can introduce you to. HINT: You don’t need someone to write checks for you, you should be doing that yourself. You need someone who is knowledgeable, trustworthy, and experienced that possesses the heart of a teacher and the willingness to educate you on the financial choices that will be best for you and your family. This individual’s main responsibility is to help you prepare for the years when you won’t be able to play anymore.

The Tax Professional – This individual plays a very important role in dealing with your tax liabilities. As a high profile athlete with a high salary and future high earnings potential, you need to fully aware of the impact of taxes. This individual’s main responsibility is to make sure your taxes are paid correctly and on time. They may also provide advice on developing charitable giving vehicles to reduce tax liability while positively impacting your community or other things you care about. Also, in the unfortunate event of a tax audit, they go to bat for you so that you can continue to concentrate on what you do best.

Some Perspective about Taxes

For those of you that have not seen the “30 for 30: Broke”, I highly recommend investing the seventy-five minutes and your internet connection here. In the first 5 minutes you notice these outrageous amounts of money that these individuals earned and no reference to taxes paid. It is highly likely that each of those amounts created tax liabilities of at least 35% at the time they received those contracts with penalties and interest for amounts not paid in the year that the compensation was received. Were they aware of this? Maybe. My point is that the IRS doesn’t care whether or not you are receiving this type of advice on when and how to pay them. Their mission is tax collection—not tax advice. I advise all my high net worth clients to visit their tax professional once per year in the late summer or fall. Why? Your tax professional will be under the most stress and pressure in the Spring right before the deadline to file taxes. The best path for you is to file an extension and sort through your tax situation towards the end of the summer where you can have plenty of time to discuss strategies for the upcoming year.

Some Perspective about Investments

Most people will advise that you diversify your investments. I totally agree. Should you diversify your financial management though? Let me give you some advice from the trenches. When a client comes to me asking me what to do about an investment I did not recommend to them, (after a lot of listening) I typically recognize the mistake that was made. Was it a mistake to invest “away from me”? Not necessarily. I am an advocate for strategies that make sense and will enhance the well being of my clients, especially if there is a more knowledgeable and cheaper way to do it than I can provide. However, it should not disrupt the overall investment plan. What do I mean? Say that we create an investment plan that includes a 10% exposure to real estate in your portfolio, but then you decide to go in with a buddy and buy a 50% stake in a strip mall without consulting me to see how this works into your plan. We then have the following: 1) a possible over-exposure to real estate in your portfolio 2) additional tax considerations when it is sold, 3) how we liquidate the investment if you need cash and the costs associated with that, 4) what rights you have as a 50% owner versus a majority owner, etc. Not that this can’t be a good investment, but I think you see the purpose of getting advice for every investment decision made. One of the best things about having a financial guy or gal, is that you get to tell everyone that wants you to invest the following: “hey, that sounds great but I need to run that by my financial advisor first”. This takes the pressure off you and protects your interest by letting a trusted, experienced professional review the idea for its merits without any bias. Here’s the takeaway, always consult your financial advisor. That’s what he’s there for!

Some Perspective about Decisions Already Made

So let’s say that you already have individuals filling all or some of these roles, but you are wondering if they are the right individuals. It happens. Let me give you some criteria to monitor performance of these individuals. In most cases, I realize it is not just business, it may also be personal so you will have to use judgment. One thing to consider though is that you have one shot to make your career provide for not only your present self, but also your future self. Your future self won’t be able to jump as high and throw as far and he is relying on your present self to make the most of what you have now. This means that you will have to undoubtedly make some difficult decisions when it comes to forming your HPT. Your loved ones and those that depend on this decision will thank you and most of all, you will be able to live with yourself.

The Agent: The objective is to be getting market value for your services to the franchise. Ideally, your agent could quantify your value to the franchise in dollar terms to produce a number that should be closely reflected in your current contract. In addition, you may require this individual to negotiate endorsements for you off the court or field. This means you should be aware of what the top 10 or 15 players at your position are earning on and off the field and why. You should also be familiar with the current collective bargaining agreement for your league and how that impacts how your contracts are negotiated. I believe this analysis provides a baseline for measuring whether you are being adequately compensated for your skills and talents. Now don’t just think this should happen overnight either. There are probably improvements you can make physically, emotionally, and mentally that would help you reach your “true” value. All this should be taken into consideration when making any decision.

The Financial Advisor: The objective is to create a financial strategy that balances properly between current and future consumption. Your investment portfolio is part of this formula and how much you save for the days when you won’t be enjoying multi-million dollar contracts. However, it also is coordinating strategies that introduce tax reduction, charitable giving and estate planning to continue your legacy for years after you play your last game.

The Tax Professional: The objective is to minimize the taxes you have to pay on the income you generate. In my experience, the focus with many investors is on how much they make. However, I would highlight that focusing on how much you keep is the more important objective and that is what your tax professional is there to do. If there is a strategy that you should be taking advantage, he or she should be telling you about it.

So for now, congratulations on your progress and your future success—you deserve it!

Maybe we will work together in the future.

Very truly yours,

Dominique J. Henderson, Sr.