My job in the last 15 (?) years has been in, generally speaking, Corporate Treasury. I contribute to the bottom line of my employer in various way:
- lower debt costs
- higher investment yield
- lower FX-related costs (based on how you see it, sometimes even a profit!)
Even if I want, there is no way I can increase the top line. That’s other departments’ job: create new products, enter new markets, find new clients. Corporate Treasury can potentially be a profit centre but there are valid reasons why it is not so for 99% of firms.
Now enter my “other job”.
In personal finance, you are the CEO of your own firm: you have revenues, costs and stakeholders. What happens in this domain is that usually (? that’s more than sometimes for sure) the CEO demands Corporate Treasury to do the job that belongs to other departments, like strategy and sales.
In this example, Corporate Treasury is how savings are invested; let’s say it also takes care of choosing how and when to fix your mortgage and your leases.
The CEO has an infinite set of requests that pile up: buying a car, getting a mega-wedding, buying a house, having kids, sending them to college, buying a bigger car, going on holidays every quarter, etc.
Most of these requests should be handled by sales, grow your salary, and strategy, stack your requests in a reasonable manner and be flexible. These are hard tasks: sales and strategy are fucking lazy bastards and do not want to work. Working hard to progress in your career, taking risky opportunities in unknown situations, moving to other cities and countries, leaving behind your friends is hard. Accepting you might not get what you thought you would get at this point of your life even though you worked harder than anyone else, especially harder than that schoolmate asshole you lurk on Instagram, is even harder.
So you go to Corporate Treasury with (not for you) unreasonable requests: I want a plan to fund all my desired expenses that come with high returns and low-to-no risk. Preferably in a manner that sucks a bit less exactly when my competitors cry and pump a bit more when they party.
That’s when things start to turn dicey. And it can happen in many ways:
- The CEO starts to believe that high-return/low-risk investments exist AND they are offered to him. Selling OTM options, high yield certificates, Ponzi schemes, Airbnb rentals, you name it. That’s why there is a big market for these types of investments, it has to work because the alternative is too hard to swallow.
- Or, on the other side of the spectrum, the CEO becomes paranoid about any risk (but inflation…) and stuff all the savings in money market instruments to cover those ginormous planned expenses in the next 5 years.
- Or, and this is the worst of all, the CEO has no idea about goals and objectives. He just “invests” because (I think) he can tell himself that at least he’s doing that (instead of asking himself the hard questions).
That’s when the Corporate Treasurer meets the Financial Advisor (the real one, not me) and short-termism becomes the rule of the game, mainly due to career risk.
There is a weird incentive system at play: if the financial advisor is put into the condition to prepare a comprehensive plan (i.e. the client did the hard work and cleaned the hard questions), they can extract some additional risk-adjusted return.
But this rarely happens. The advisor cannot tell the client to do the job because the risk of them walking is too high: who accepts to pay someone when they have to do the work? Not counting the fact that explaining the pros and cons of the strategy runs into the classic issues with investments: we face many possible futures but only one happens. (not sophisticated) clients judge you on the latter. How can an advisor demonstrate they built protection against a risk that could have happened but didn’t?
As in the case of the corporate treasurer, the strategy builds value through small, incremental actions. Hardly notable on a year-by-year basis, further obfuscated by the noise happening at the bottom line level. Same with personal finance: not only do markets move violently, up and down, but the client goals change. Promotions, kids, actually one of the two cannot have kids, divorce, layoffs…
Enters the short-sighted “goal-based plan”, a more useful strategy TO the financial advisor, who can decompose a hard problem into smaller, easier-to-explain stories, and TO the client, who can avoid the hard questions.
Look how flexible and safe I am!
Flexible on the investment decisions, not on the goals. This flexibility has a price but to notice it you have to step away from the short-term view. Cancel the noise. Stop looking at the tree and see the forest. Realise the unrealised compounding you left on the table. This is not greed, this is a meaningfully lower standard of living in retirement. A couple of additional years stuck in your job instead of retiring earlier.
But who cares when you can fool yourself by pointing at the “long-term bucket” when things go well and to the other ones when things go south but “you still reached your goals”? Sure, congrats on the new car, let’s meet again when you are 75 and still working. Let’s not even go to analyse how the sequence of returns dramatically impacts YOUR RETURN (not the average one) even when you are accumulating assets.
By now, you must be confused. How can objectives and goals be so important while a goal-based investment strategy is trash? Well, it is not trash, it is lazy; it is “lazy in -> lazy out”. Because the first stage analysis is lazy, considering incentives and agency problems, the second stage is lazy too.
Do not fall for it. More importantly, realise that if you are in that situation (i.e. you use the goal-based strategy yourself or your financial advisor suggest it to you) it is mainly because you didn’t do your homework.
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