Applying the investment advisor’s eye

By Christopher Peck

There’s a phrase I often use in discussion with clients: “applying the investment advisor’s eye.” What do I mean by this? You probably have a sense of what it means when looking at financial assets, but what about for our personal assets and tangible assets? What types of questions do we ask? How do we think about, analyze, and put in perspective these alternative and non-traditional investments?

Cx FranklinEyes cropCertainly we all know what it means to think critically about these spending-investing decisions like buying a home or financing a college education. What are some elements of this type of thinking that we could apply to decisions about our social and community assets, or the tangible “things” we convert our money into? In general, applying the investment advisor’s eye means being more comprehensive in your thinking: think about the money with some degree of financial sophistication, think about how your decisions affect your family and your community, think about how you are helping or hindering the building of a better world. More specifically, there are four big things we do: we make sure the investment is in line with community and ecological values, we do the math, we evaluate risks, and we think comprehensively to make sure we allocate properly.

Doing the math means asking a series of questions: how much does it cost, either in time or cash, and what does it return, in money, or a tangible value like food or habitat (for you or for other species), or an intangible value like community-building or health or peace of mind. How and when do the costs have to be paid out? When and how do the returns start to come in? We’re regularly scanning for activities that require a small investment but provide a big return; we call this “bang for the buck” in the investment world. We also look at the certainty or lack thereof with the investment – do we know we can rely on the investment to perform the way we think it should? In the financial realm, are you protecting your capital, and maintaining sufficient liquidity?  When you draw from your financial assets to diversify into personal or tangible assets, it’s time to give some thought to how you’ll assess the “returns” on those non-financial assets that you’re now holding, and often growing.

We’re also always asking about risks. Could the investment go bad or be a waste of time, and if so, how bad would that be for you? Are there any obvious problems to be on the look out for, and how can you build in some adaptability if the problems arise? What type of risk does the investment expose us to? It’s important to remember that everything entails risk, even doing nothing (opportunity cost risk), so the question is: what risks and how risky? A short list of some of the risks we look at with financial assets might include interest rates, government intervention, lack of government intervention, currency fluctuations, and climate change.  Some of these may apply to other asset types, where you’ll want to consider some fresh perspectives on risk as well: changes in your health or economic disruptions in your community would likely affect your personal assets, for example, while severe weather could impact some of your tangible assets. We’re always looking for ways to reduce risks, either with diversification or hedging or other strategies.

Once we’ve done the math and looked at risks, the next component is looking for balance between the selected investment options. We sometimes joke that diversification is investment advisor 101: don’t put all your eggs in one basket. Obviously, our broader picture of assets is offering you even more baskets than those you’re already using for financial instruments. We also look for correlations to other investments, which is a fancy way of saying that we try to reduce some risks by including other investments that provide a balance. This can also happen in a non-obvious way, such as by including even riskier investments to reduce the overall risk. In general, asset allocation is more art than science, balancing the spreadsheet factors with a sense of overall fitness. 

This is, of course, a very quick introduction to a topic that we’ve all given a lot of thought to over the years, and we look forward to more in-depth conversations about your individual needs and choices about how to balance your financial, personal, and tangible assets.

This piece first appeared in the Summer 2013 edition of the Natural Investment News

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Christopher Peck

Welcome to my archive of newsletter articles and blog posts. For more information on my service offerings, please go to my advisor webpage.

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