Your Portfolio and the Saguaro Cactus

The Saguaro cactus (pronounced Sah-wa-ro) grows exclusively in the Sonoran Desert, which extends into areas of California, Arizona and Northern Mexico. It’s an incredible plant with amazing characteristics and a lifespan measured in centuries.

Because of its massive size and unique internal and external structure, it serves as a home and water source for multiple other species in its ecosystem. But this fascinating plant also offers some powerful “investment portfolio” lessons.

  1. The Saguaro is incredibly slow growing. After 10 years, it’s typically only about 1 ½ inches tall – that’s inches, not feet! But as the decades roll by, it reaches a full height of 40 to 60 feet and can weigh 3,200 to 4,800 pounds. Saguaros can live for 150 to 200 years.

Just like the Saguaro, it takes time to grow an investment portfolio. A lot of time. The power of compounding is always present but really starts to kick in after about a decade. We can’t get frustrated and try to accelerate this process by taking unnecessary financial risks.

  1. The Saguaro’s life cycle is quite volatile. Neighboring animals are constantly drilling into the cactus to extract water. Along with variations in the local climate and particularly rainfall, this means that the Saguaro’s water reserves can vary significantly. They can shrink or swell in size by 20-25% over the course of a year.

Investment portfolios can undergo similar volatility. That’s the “environment” of the investment trade-off: the potential for return is paired with the potential for volatility. And like the Saguaro we need to persevere. The Saguaro doesn’t shrivel up and die but rolls with the punches and continues its progression of growth.

  1. The Saguaro has a very particular blooming cycle. Once per year, in the late spring, its white flowers bloom at night and last through the next midday, providing only a small pollination window. The flowers secrete a sweet nectar that attracts birds, bats and other insects who pollinate the blooms, leading to Saguaro cactus fruit in the fall. A single fruit can produce thousands of seeds to help grow the next Saguaro.

Like the Saguaro’s small pollination window, we don’t know in advance when investment gains will happen. There’s no shortage of theories about how to try to time the market, but historically the best approach to avoid missing out on gains has been simply to stay invested and let the power of the market work for you. Doing so allows folks to not only reap the fruit of ongoing interest and dividends, but also to grow portfolios through capital appreciation.

  1. Saguaros are considered to be a foundational or keystone species. They provide much to their local ecosystem – nesting, homes, and water to numerous animals including owls, woodpeckers, snakes, mice, bats, insects, and even bobcats.

Portfolios are also foundational. They serve a greater purpose than their own numerical value. Ideally, we’ve given them plenty of time to grow and stayed with them through thick and thin.  In return, they will fund our personal lifestyles, goals and dreams as well as potentially those of our family or favorite charities.


Posted in Uncategorized

Investment Lessons from the University of Maryland Baltimore County “Retrievers”


The most dramatic game of the 2018 NCAA Men’s Basketball tournament thus far was the victory of 16th seeded University of Maryland Baltimore County (UMBC) over the (overall) number one seeded University of Virginia (UVA).  For those not familiar, the NCAA tournament is a 64-team tournament, split into 4 regions. Within each region, teams are initially seeded or ranked from 1 to 16 – the higher the seeding, the better the team.

Based on probability, UMBC was not supposed to win the game and UVA was not supposed to lose the game.  There have been 135 previous matchups between #1 and #16 seeds over the last 30+ years and the #16 seed has never won.  Ever.  Because of this fact, 99.4% of all NCAA brackets had picked UVA to win the game. But that’s not what happened.  It was the thrill of victory for Baltimore and the agony of defeat for Charlottesville.

I don’t follow college basketball as much as I used to.  I’m a casual fan but this game got me thinking about statistics, and biases, and investment philosophy.  The game was a fantastic spectacle full of investment lessons for us all, starting with…

#1  The rare circumstance can happen, but it’s rare for a reason.

The first lesson is that we don’t want to take on unnecessary risk by chasing stocks that we heard someone talk about on the radio or TV.  We ought not try to build wealth by hitting “home-runs.” Could we possibly identify the next Amazon, Facebook, Google, or Apple before their share prices exploded? Maybe, but the odds are certainly not in our favor.  It may seem obvious in retrospect later, but it wasn’t obvious beforehand.  Better to stick with the steady and prudent approach to accumulating wealth that has stood the test of time.

I saw an online image of a ticket from a sports book that shows an $800 bet on UMBC that resulted in a payout of $16,800.  It’s so enticing – all I had to do was bet $800 and I would have made back 20 times that amount.  Well you would have, on this bet.  If you had bet the same $800 on all the previous #1 vs. #16 seed games, you would have lost $108,000.  Suddenly the $16,800 payoff doesn’t seem that great.

But what if you were a student or a graduate or a former player for UMBC? Surely you have an inside track or some special knowledge.  Well, you think that because you’re suffering from…

#2  Hometown and other biases

I spent 7 years living in Charlottesville, and I know a fair amount of people connected with UVA.  Did that color my thoughts on them possibly winning this particular basketball game?  I can’t say for certain, but it likely did.  I probably thought consciously or sub-consciously that they would win because they were the better team, they were supposed to win and plus, I lived a few miles from the university.  And it’s an excellent university – but I’m biased.

As mentioned earlier, only 0.6% of all brackets picked UMBC to beat UVA.  My guess is that most of those 0.6% live within a 10-mile radius of the UMBC campus or had some affiliation with the university.  I don’t think they had any special knowledge, I think they were just being fans.

We often become fans of our investments.  We might own a lot of our employer’s stock because we earn our paycheck there, we understand how things work (at least we think we do), and we’re “fans” of the company.  We might own a disproportionate amount of stock in a company because we like their snazzy products or their hip services.  And we incorrectly think that this company whose stock we own will always be good, which leads us to our next investment lesson…

#3  Great stocks or great companies don’t always remain so.

UVA was not supposed to lose this game.  They were the #1 seed.  They were favored by 20+ points.  They were a lock.  But they lost the game.  And just like the favorites can lose, great companies can fall and struggle and be in the news for all the wrong reasons.  Technology is changing at breakneck speed, there’s constant innovation in so many different fields of industry, and there’s an awful lot about companies that we don’t know and can’t predict – even if we work there or even if we love their products.

The UMBC-UVA basketball game was one for the ages.  If the statistics hold, there won’t be a win by a #16 seed for another 30 years.  While we patiently wait for the next “greatest upset of all time”, we can manage our investments in such a way that we don’t have to swing for the fences or let our biases get the best of us.  Ideally, we want our investments to own all the teams in the tournament because what we expect to happen might not actually happen.


Posted in Uncategorized

When is a dollar not a dollar?

Last year, I went to a holiday party where a magician performed tricks for small groups of guests during the cocktail hour. One of his tricks involved taking a crisp dollar bill from me, after I’d written my name on it to demonstrate its authenticity later. The magician then folded up my dollar bill and tore it into pieces.

As a financial planner, I wasn’t amused at the wanton destruction of my money. But the magician moved forward with the trick and somehow put my dollar bill back together, albeit in a somewhat differently arranged manner.


I was left with a dollar…but it wasn’t really a dollar. I couldn’t spend it anywhere. And the experience got me thinking: when else is a dollar not exactly a dollar?

I came up with at least four examples, though there are likely more:

Inside of a Traditional IRA or 401k

These accounts are funded with pre-tax dollars and aren’t subject to taxes while funds stay inside the accounts. But any withdrawals are taxed at ordinary income tax rates, which are the same rates applied to wages. This means that the government technically has a claim on some portion of the funds: someone with an IRA valued at $1 million only “owns” about $700,000 – $800,000, after factoring in taxes.

Annuities with surrender charges

Insurance companies pay the people who sell variable annuities sizable commissions. Folks who buy those annuities can change their minds later and surrender the policies for whatever the value happens to be. If this happens early in the contract of the annuity, the insurance company would be out the money paid on the commission without having the chance to recoup its costs via the (often high) underlying expenses of the contract.

Enter the surrender charge. Rather being able to surrender a policy for full value, owners must pay a charge equal to anywhere between 1-10% of the surrender value for up to the first 5-10 years of the annuity, depending on the contract. As with the IRA example, a variable annuity with a stated value of $1 million may only be worth $900,000, if surrendered in Year 1 with a 10% surrender charge.

When retail investors want to sell individual bonds

Most bonds are bought and sold by institutional investors, who often trade in chunks of hundreds of thousands or millions of dollars. They are the ones setting the bond prices that people see when they view their account statements or check their accounts online. But when retail investors try to sell their individual bonds on the open market, they are often surprised that the price they receive is significantly lower than the “market” price. That’s because there aren’t many buyers for small lots of individual bonds. Values on a statement may not match values in real life.

People with too much cash stored in savings accounts

This example may be the most worst, because on the surface it looks like nothing bad is happening. Consider an account holder who, feeling scared in January, 2008, pulled $100,000 from his investment portfolio, stashed it in a savings account because it felt “safe” relative to the financial chaos going on around him, and left it there for security.

The appeal is that the savings account never goes down in value, unlike his investment portfolio that experienced a lot of volatility through the financial crises. Using the Citi 3-month Treasury Bill index as a proxy for cash, by December, 2017 the savings account had grown to $103,501, for an annual return of 0.34% with zero decreases in value.

But that’s an illusion: if the investor considered the “real” return (net of inflation) of the savings account instead of just the nominal return, things don’t look so good. From January, 2008 through December, 2017, the annualized rate of inflation (as measured by the US Consumer Price Index) was 1.61%. That’s historically very low, but so are the nominal returns for our cash proxy. When adjusted for inflation, the 1/2008 – 12/2017 annualized return of the 3-month T-bill has been -1.25%, which means that the initial $100,000 deposit can only buy $88,182 worth of stuff.

The magician’s trick was fun and games. But at Woodward Financial Advisors, we think it’s serious business to help our clients recognize the full value of as many of their dollars as we can. If you’re interested in seeing if we can help you, please let us know.

Posted in Financial Planning | Tagged ,

Paving the Way

man walking in snow

During a recent snowstorm here in Chapel Hill, I was obliged to commute to work the old-fashioned way – by walking.  It was one of those storms where the roads weren’t an option due to snow and ice, and one where most folks decided to simply stay home.  That meant I would be one of the only “moving” things in the vast white landscape, and I’d likely still be one of the only people out when it came time to end my day after work.

I bundled up and headed out the door, freshly falling snow awaiting me as I made my way through Carolina Forest and then onto MLK Boulevard. Ten minutes into my walk, I noticed that I was simply trudging through the snow – not following any clear path. I questioned my technique and wondered if taking a more focused approach would produce better results. It occurred to me that if I planned properly and made some sacrifices on my way in, such as maintaining a straight path and clearing some snow as I walked, I would be setting myself up for a much easier walk home, since I’d be returning on the very same path at the end of the day.

In many ways, my trek into work was like the financial path we pave for ourselves: the steps we take today can help set us up for future success. That’s a simple, key tenet of building wealth.

If you’re just starting your wealth building journey – or even if you are in your peak earnings years – it’s important to ask yourself if you are optimally paving your long-term financial road.

Maybe it’s time to open that Roth IRA account and set up an automated mechanism to fund it monthly.  Maybe it’s time to defer more of your salary (or even the maximum allowable) into your 401k plan and go beyond the amount for which you receive a company match.  If you’re already maximizing contributions to your tax-deferred accounts, why not open and fund an after-tax investment account?

Just as my focused morning walk through the snow required discipline, your financial decisions will likely require some sacrifice. We each must evaluate our overall financial situation before moving forward.  But paving the way today often leads to great results down the road. This financial planning in advance and longer-term commitment will:

  1. Supercharge your asset growth and let you make the most of compounding.
  2. Provide you greater flexibility if you need or want to retire from your full-time job.
  3. Reduce your need to take excessive financial risk with your assets.

When it was time for me to head home and “retire,” I followed my previously paved path as I walked comfortably past 12-inch snow drifts that rose to my right and left, thankful that I had done the hard work earlier on.  Whether you’re starting your wealth building journey or are decades into it – contact us at Woodward Financial Advisors if you’d like to learn more about our services to help you build your wealth and make the most of your financial resources.

Posted in Financial Planning, Investing, Retirement Planning