Re-Building Wealth is about Balance and Control


by J David Lewis

With media recognizing recovery may be underway, we see news items purporting to give lists of unique and specific steps to repair 401(k)s and other portfolios. From considering broader issues of strengthening Net Worth, it takes more than quick fixes.

Near the Wright Brothers 100th First Flight anniversary, a Neal Armstrong interview explored their influence on his career and moon visit.  Paraphrasing here; “The Wright Brothers correctly identified inability to fly as an inability to master balance and control.”  People learned to create lift with wings long before this success.  They could see balancing and controlling the craft were key missing pieces.  Armstrong followed; “Mastery of balance and control remains the critical issue with all flight, including space flight.”

I remember feeling struck that this profound observation relates to financial planning.  We have all seen people with substantial income and little mastery of financial balance and control.  Most of the issues leading to the current economic problems are traceable to financial balance and control issues.  Remember feeling fear no one could regain balance and control.

Some people were mathematically unable to tolerate risks, from years being sheltered with illusions of balanced control.  Even small declines meant disaster.  A second group had (and still have) plenty in mathematical terms.  These could feel fear from uncertainty about whether they have enough.  Sometimes professionals can coach these into appropriately feeling secure.  Others can mathematically or emotionally “keep their cool,” yet get shaken when real events seem far outside their expectations.  Historical experience and understanding, before a crisis, can give better perspective for these.

In crisis, all three group’s greatest risk is feeling they must do something – anything.  They look for “quick fixes.”  And, quick fixes are popular TV news.  Pilots, who try quick fixes without understanding all the elements of balance and control, can quickly turn slight imbalance into disaster.

To maintain balance and control through smooth and turbulent air, good instruments are critical.  In personal finance, the instruments are comprehensive information.  Comprehensive is far more than portfolio “performance reports.”  Comprehensive information regularly measures net worth changes, with emphasis on the controls you can affect.  How much did you reduce total debt? Are debt costs efficient?  How about investment contributions?  Did amenities, like a boat, increase assets?  Did that increase debt?  Is debt a reasonable percentage of total assets?

Dollars from investment performance are almost always a minor influence relative to elements you can personally control.  Consider dollar-differences in return between two portfolios.  Those dollars cannot build nearly as much wealth as investment contributions or debt payments, unless the portfolio is huge.  Without contributions, very high returns still can’t produce significant dollars. Good portfolio returns are a matter of prudence and stewardship – not a primary source of wealth.

A comprehensive reporting system needs experience and judgment.  The pilot processes considerable information to balance and control the craft.  Some do this with finances almost like the skill is genetic.   Others need help.  Wherever you fit; the path to repairing perceived damage starts with clearly understanding whether a mathematical problem exists.  Then, comprehensive information, coupled with judgment and experience, are tools for smooth balance and control.  You should be able to stay calm, whether the bulls or bears are raging. 

For a discussion of the ways Resource Advisory Services helps clients with the issues of this article read Our Methods and Our Investment Philosophy.

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