April 25, 2023

Beautiful truths emerge at the crossroads of unlikely encounters. This truth is no exception: it emerges between a Grandmaster of an ancient board game, a computer program, and a legendary record producer.

Rick Rubin is that record producer–for those unfamiliar, he produced records for everyone from the Beastie Boys to Johnny Cash to Metallica to Red Hot Chili Peppers. He has literally shaped generations of music. Rick recently wrote a book, “The Creative Act: A Way of Being”, where he recalls watching something miraculous unfold on live television.

Lee Se-Dol, a world-renowned Go player, was playing Google’s famous AlphaGo computer in a game that became a battle between humanity and technology. In a surprise twist, AlphaGo beat Lee Se-Dol. The game of Go was thought to be impossible for a computer to win due to its complexity, with more possible configurations for pieces than atoms in the observable universe.

Watching Lee lose, Rick Rubin realized he was crying. He said:

“Why would I be crying? I don’t care [about Go]. And what I came to realize was the computer didn’t win because it was smarter than the man. The computer didn’t know more than the man. The computer knew less. The computer wasn’t steeped in the lore of the game. All the computer knew were the rules. So, it did a move that no seasoned player would ever do because seasoned players are taught by seasoned players, and the seasoned players are following whatever the accepted version of playing the game is — not the rules of the game, but the socially acceptable way to play the game.”

My point is coming; I promise.

I had a professor in college named Emma Rasiel–she is the Teaching Director of the Duke Financial Economics Center. With her background in investing as a past vice president at Goldman Sachs, years later I helped facilitate a continuing education seminar in Seattle with her as the guest lecturer. Creeping up on age sixty herself, she said something that shocked most of the room.

She said “I am 100% invested in stock, and will continue to be for a long time. I also haven’t looked at my portfolio in many years.”

Time to bring these together–stay with me.

For a long time in the investing world, the prevailing wisdom has been to become more and more conservative as you get closer to retiring. Modern portfolio theory popularized the “60-40” portfolio, with 60% of one’s retirement portfolio in equities (stock) and 40% in fixed income (bonds) and cash. I liken this to Rick Rubin’s comment about being “steeped in lore”. For generations now, financial advisors have taught financial advisors to invest in certain ways. Today, that kind of recommendation isn’t purely founded on rational sense–it is also a matter of what is considered socially acceptable to recommend. Like the grandmasters of Go playing the accepted version of the game, the investing world has an accepted way to invest.

If we are willing to step back from ingrained philosophies, we can find opportunities to improve.
Emma Rasiel realized that mathematically speaking, she was better off leaving her portfolio alone, staying invested in equities, and allowing time to work in her favor. Even with the added volatility from completely investing in stock, she reasoned that her average expected return was so much higher than bond returns that she would come out ahead, even if her income partially came out when stocks were down.

There is still a place for cash, bonds, and other non-equity assets, of course. And even Emma, a semi-professional poker player with her spare time, admits she doesn’t look at her portfolio because she knows if she does, she will worry and feel pressure to change things.

But when a client has Social Security, a pension, or other income producing assets besides their investment accounts, we don’t necessarily have to sell large amounts of stock and move to conservative assets. Instead, we stay invested according to the 20 or 30+ year timeline that a retired client can expect. If they have any goals for leaving a legacy behind, the timeline for large portions of their money might even be beyond their own lifetime. As a result, many of our clients might be 70%, 80%, and above invested in stock even as they enter their sixties and seventies.

We even sometimes recommend clients stay in growth mode at first, shift to a more conservative posture partway through retirement, and later reorient to growth mode again! A well-customized portfolio reflects different seasons in your life.

The beauty of these recommendations is that they don’t come from fifty years of traditional investing status quo and defaulting to what is commonly acceptable. Our recommendations come from understanding each clients’ particular set of circumstances and resources, their ability to tolerate risk, and our best insight into how different investments actually behave over time. The foundation to all of this is recommending what is precisely best for the client, rather than the recommendation that makes heads nod yes but leaves opportunity on the table. We leave rules of thumb to the hitchhikers and financial gurus.

Historical expectations can be a North Star we use to orient ourselves, but we are not going to take old-school thinking and blindly accept it as gospel. By setting preconceptions aside and continually bringing fresh eyes to a client’s financial plan, we can reach recommendations that sometimes surprise and, done properly, lead to a higher likelihood of success.

This holds true across planning advice as much as investing. We might recommend you take Social Security at 62 or 70, deliberately increase your tax bill in some years, stop paying for insurance, spend more rather than less, or even team up with an estate attorney to set up a trust that is intentionally designed to “fail”. We have told clients to take money out of their IRAs early, save over 50% (or 0%) of their income, and to both surrender or keep their annuities. They can all make sense in the right context, even if they go against the grain of what people commonly recommend.

One thing I am not saying (nor was Rick Rubin), is to be a coldly rational computer program. Far from it. Rick’s point is actually about creativity. Investing and financial planning is as much a creative art as it is mathematics and modeling. Creativity comes from a willingness to be different. It is the secret to progress and better solutions.

AlphaGo, the Google-created computer who beat the Grandmaster, shocked spectators with creative maneuvers and what looked like errors that turned out to be ingenious new moves. Because it wasn’t laden with the burden of traditional thinking, it was able to flip an ancient board game on its head with new techniques. There is a remarkable parallel in the planning world.

To be fair, there are timeless principles that continue to stand the test of time. And you won’t find us making recommendations about the latest cryptocurrencies or penny stocks. We strive to be open to new ideas, but still stay grounded in the principles of what makes a reliable investment.

Pablo Picasso embodied the essence of my ramblings when he said, “Art is the elimination of the unnecessary.”


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