The right financial advisor can help you achieve your financial goals faster and manage your money more efficiently. However, financial advisors are not one-size-fits-all. The best financial advisor for you may be very different than the best financial advisor for your coworker, neighbor, or even family member. There are financial advisors who specialize in different income levels, estate planning needs, budgeting guidance, and other niche areas. You don’t want to pay for services you don’t need or end up with an advisor without the specific knowledge needed to manage your unique assets.  

Finding a financial advisor whose investment philosophy matches your own is key to a happy relationship. All investment strategies share some common elements – no one has the goal of losing money – but take different approaches to choosing where to invest and why to make those investments. Investment philosophies are coherent ways of thinking about markets, how they work, and the types of mistakes that consistently underlie investor behavior. 

Why Does Your Financial Advisor’s Investment Philosophy Matter? 

“The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.” - Benjamin Graham in The Intelligent Investor 

If all investment philosophies seek positive returns, then why does your financial advisor’s investment philosophy matter? Your personal investment philosophy should take into account your financial goals and capital needs, your risk tolerance, and your timeline. Choosing a financial advisor whose philosophy lines up with your own ensures that your investments will work for you in the ways you need. Most investors who are successful over the long-term refine their investment philosophies over time and do not switch between philosophies in response to market conditions. Common investment philosophies include: 

• Contrarian investing holds a belief that some crowd behaviors amongst investors lead to mispricings in securities markets that can be exploited by buying and selling in contrast to the prevailing trend of the time.
• Fundamentals investing focuses on companies with strong earning potential.
• Growth investing favors companies that show above-average growth, even with high current stock prices.
• Technical investing examines past market data to uncover patterns on which to base buy and sell decisions.
• Socially-responsible investing follows a set of moral/ethical business values to invest in companies with social and/or environmental values that align with the investor’s, such as low emissions or no animal testing.    
• Value investing seeks to buy securities that are underpriced by the market that the investor believes will rise in price significantly over time.   

These are broad categories and an individual investor or firm may incorporate elements of different philosophies into their own investment philosophy.  

What is Ridgewood Investments' Investment Philosophy? 

"Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” 
— Warren Buffett in a 2008 letter to Berkshire Hathaway’s shareholders 

At Ridgewood Investments, our investment philosophy draws on the considerable experience of our partners managing investments across market environments on an institutional scale. We seek to help our clients achieve exceptional long-term investment performance through the application of proven principles of a value investing philosophy that can succeed regardless of current market conditions.

• We treat investing like a business. Investing requires careful research and understands of past performance, market trends, and what fundamentals you can and cannot control. Our financial advisors apply patience, discipline, and plenty of hard work to hone our investment strategies and practice over time. 
• We are value investors. We believe that price-paid is important and that a value-based and value-conscious approach to committing a great business can be a poor investment if the price is too high. On the other hand, great investment opportunities can be found in areas that are currently overlooked and therefore offer lower prices with long-term return potential.  
• We use margin of safety to understand and manage risk. Margin of safety is when an investor only purchases securities when their market price is significantly below their intrinsic value. We design our investment portfolios to compound our investors capital over time while carefully mitigating unnecessary risk. Risk is permanent loss of capital as opposed to temporary market fluctuations. We believe volatility can create opportunities for long-term investors. This is an area in which we differ from the majority of advisors and individual investors. 

What Does Our Investment Philosophy Not Include?

“Understand the nature of the companies you own and the specific reasons for holding the stock. (“It is really going up!” doesn’t count.)” ― Peter Lynch, One Up On Wall Street: How To Use What You Already Know To Make Money In The Market 

Just as important is what our investment philosophy does not include: 

1. A short-term approach. We emphasize patiently compounding capital over time and focus on the long-term results of our investments. We invest for rolling investment horizons of between 5-10 years in most cases (although shorter/longer horizons may be used if needed). Investment success is built over years of steady compounding and not by forever chasing the hot stock of the moment.   
2. Investments outside our circle of competence. No one advisor or group of advisors can competently understand every minute investment option available. We limit our investment activities to areas of investment than we think we can understand, also known as sticking to our own circle of competence. Warren Buffet said “Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital." Operating within our circle of competence allows us to capably evaluate potential investments and make effective decisions.  
3. Focusing solely on historical numbers. While those who don’t know the past might be doomed to repeat it, those who expect the past to neatly repeat are also in for a rude awakening. Historical numbers are only relevant insofar as they foreshadow future changes. Our advisors also examine qualitative factors such as the nature of the business, company culture, the quality and character of the individuals running the business, and the capital allocation policies the company is likely to implement in the future. We take all these factors into account, along with understanding past performance, to choose investments that will lead to long-term gains for our clients. 

Our investment philosophy draws from successful philosophies, practices and insights of outstanding investors like Warren Buffett, Philip Fisher, Benjamin Graham, Bob Kirby, Peter Lynch and other extraordinary investors. Using the knowledge and experience we’ve collectively gained over years of investing; we seek to provide exceptional long-term performance for our clients. If Ridgewood Investments seems like a good fit for your financial needs, contact us for a free investment review.  

When planning for retirement in the United States, Social Security is the common denominator for the vast majority of workers. After spending your working life paying into the system, being eligible to collect Social Security benefits is one of the hallmarks of American retirement.

Social Security is a federally-run insurance program that provides retirement benefits, survivor benefits, and disability income to provide economic security for millions of Americans each year. As of June 2019, approximately 64 million people received monthly Social Security benefits, about 48 million of whom were retirees and their families.

Retirees can start collecting a reduced benefit at 62. After working forty plus years, it can be tempting to start enjoying guaranteed monthly income as soon as you are eligible. However, there are tradeoffs to collecting early and many workers may benefit by waiting a few years to begin collecting.

Who Can Take Social Security Benefits?

Social Security benefits are available to older Americans, workers who become disabled, and families who experience the loss of a spouse or parent. Rules around collecting benefits for the loss of a parent or for disability are too complicated to address in a short article. If either situation applies to you, I recommend working with your Financial Advisor and/or contacting the appropriate benefit specialists at the Social Security Administration (SSA). For the average retiree, who is the most common beneficiary of Social Security, the rules are much easier to understand.

To qualify for Social Security payments, you or your spouse must have paid the Social Security payroll tax for at least 10 years over your working history. Nonworking spouses can be eligible to collect up to half of the working spouse’s benefit.

Your 35 highest-earning working years, indexed for inflation, are used to calculate your benefits. There is a limit to the amount of annual income that qualifies for the Social Security calculation ($137,700 for 2020). In general, higher earners can expect to receive more in benefits from Social Security.

When Am I Eligible to Collect Benefits? 

Retirees can begin collecting as early as 62 or as late as 70 (even earlier as a survivor of another Social Security claimant or with a disability).

Full retirement age depends on your birth year:

When is the Best Time to Start My Benefits?

The decision of when to start collecting Social Security benefits is highly personal. In deciding when to begin taking your Social Security benefits, you should consider:

• Current employment. Earned income (including self-employment income) can reduce your benefit. If you are working and collecting Social Security benefits prior to full retirement age, $1 in benefits is deducted for every $2 you earn above the annual limit ($18,240 for 2020). The reduction in benefits falls to $1 in benefits for every $3 you earn above a much higher annual limit ($48,600 for 2020) in the year you reach full retirement age.
• Your healthcare. While you can begin drawing reduced Social Security benefits at 62, Medicare eligibility is set to 65. If you do not have employer-sponsored health insurance through your employer or your spouse’s employer, private health insurance will wipe out a large portion of your Social Security payments each month.
• Your life expectancy. According to the SSA, average life expectancy for an individual turning 65 years old on April 1, 2020 is about 84 years for males and 86.5 for females. You can use the SSA’s life expectancy calculator to see the average life expectancy for an individual of your gender and date of birth. Of course, the calculator does not take into account your lifestyle, family and personal health history, education, and other factors that can affect your life expectancy. If you are in good health, the higher benefits over 20+ years may outweigh the benefits of early payments. If you are in poor health, immediate access to guaranteed income from Social Security may be the right choice in some circumstances.
• Your spouse. Married couples live longer on average than single folks and have an above average probability of one or both spouses living to 90. Many couples do the math and find that waiting to have the higher earning spouse claim benefits as long as possible, up to age 70, is the best choice for their situation. The lower income spouse may be able to claim earlier, depending on the couple’s finances. After the death of one spouse, the surviving spouse receives the larger of the two benefits for his or her lifetime. For couples with a large difference in average earnings over the course of their careers, this can make a significant difference in the financial health of the surviving spouse.
• Current cash needs. Do you have an alternate means of income? Working longer or drawing on other retirement accounts can help you maximize your monthly benefits.

How Can I Maximize My Benefits?

You can increase your monthly benefit amount in two ways:

• Keep working. If you have less than 35 years of income history, each additional year you work replaces a zero-income year in the calculation for your benefits. If you’ve worked a full 35 years but have moved up the company ladder, another year at your current income can edge out a lower income year from earlier in your career.
• Collect later. Beginning your benefits at age 62 results in a permanently reduced monthly benefit while delaying to age 70 yields the highest possible monthly benefit. Talk with your financial advisor about what your break-even age is for delaying beginning Social Security benefits. The break-even age will vary depending on what your tax assumptions are and the opportunity cost of waiting. In general, if you think you will beat the average life expectancy or if you are the higher earning spouse and want to maximize survivors benefits for your spouse, waiting to claim benefits may be the better option. If you are in poor health or are the lower income spouse (and your partner can delay beginning benefits), claiming earlier may make more senses for your situation.

Is Social Security Enough for Retirement?

Social Security was never meant to be the sole source of income for retirees. The average monthly benefit as of January 2020 was $1,503. The maximum monthly benefit for someone retiring at full retirement age in 2020 is $3,011. Social Security claimants receive modest cost-of-living adjustments (COLA) based on inflation each year, ranging from 0-3.6% over the past decade. The 2020 COLA was 1.6% and a similar COLA is expected for 2021.

Wondering if Social Security will still be around by the time you retire? You may have heard that Social Security is funded by current workers and the coming retirements of baby boomers could overwhelm the system. As of June 2019, about 177 million people worked and paid Social Security taxes. According to the SSA’s 2020 Annual Report, the Social Security Trust fund has enough resources to cover all promised retirement benefits until 2035 and will cover 79% of scheduled benefits for new retirees after 2035 without changing the current system.

While planning for retirement, it may be best to think of Social Security as a form of insurance, not as a primary income source for your golden years. Most financial advisors recommend that your retirement income needs to replace 70-80% of your pre-retirement income for a comfortable lifestyle throughout your golden years.

The amount of pre-retirement wages that Social Security benefits replace varies based on what your average earnings were and when you chose to begin collecting. The maximum yearly benefit for an individual collecting at the full retirement age in 2010 comes to $36,132. For many retirees, this is too little to support their desired lifestyle.

Don’t leave taxes out of your retirement calculations – about 40% of current Social Security beneficiaries pay taxes on their benefits. Filing as an individual on your federal tax return, you may have to pay taxes on your benefits if your total income exceeds $25,000 ($32,000 for couples filing jointly).

Your retirement plan should take into account your investments, savings, and Social Security benefits to provide the retirement income you need to support you throughout your golden years. A trusted Financial Advisor like our team at Ridgewood Investments will help you prepare your portfolio to provide the income you need in retirement so you can spend less time worrying about Social Security benefits and more time planning the hobbies, travel, or other goals you plan to pursue in retirement.

The United States officially entered a recession in February 2020, ending the longest economic expansion in American history. The contraction in March 2020 was so severe that the National Bureau of Economic Research declared a recession in June, without waiting for a second complete quarter of negative growth. 

The prevailing wisdom says that investors should hunker down and ride out market declines. In reality, a noteworthy portion of investors sell off their holdings when markets fall, fearing further loss. Earlier this year, I had a family member call me and say “I know you told me not to cash out, but I did. What do I do now?”.

My family member was far from the only one to sell off when the market fell. According to Morningstar, spooked investors pulled a net $326 billion from mutual funds and exchange-traded funds in March. For most of those investors, that money remains out of the market.

If you were one of the investors who sold out earlier this year, you may be wondering why selling out was likely the wrong choice and how and when to get back into the market.

Why Is Selling Out Likely a Bad Idea?

A well-diversified portfolio is designed to handle market volatility while still trending towards long term gains. Whereas a painful short-term loss may be unavoidable in a market-wide crash, diversification works to prevent losses from which your portfolio may not recover.

Moving to cash can seem like a prudent move to stem further losses when the market rapidly drops. However, holding a large portion of your assets in cash may be a poor choice for most investors. Cash can be a difficult allocation because:

• Interest rates are historically low. The Federal Reserve has kept interest rates low since the last financial crisis in 2009. The current rate is near zero which means that cash holding like bank accounts and short-term money market funds are earning less than the rate of inflation. Anytime your savings grow at less than the rate of inflation, you are effectively losing money. 
• Holding cash means missing out on market gains. The S&P 500 closed at a record high on August 18, 2020 and surpassed that high on September 2, 2020, erasing the market losses early in the coronavirus pandemic. Investors who pulled their money from the market in March endured the market plunge without the relatively rapid market recovery that followed.

How is the Stock Market Recovering Faster than the General Economy?

The economy and the stock market do not move in tandem, even in normal times. The economy is concerned with what is going on right now and in the recent past – higher unemployment, Main Street small business closures, and ongoing lockdowns to control the spread of the coronavirus. Economists look at historical data from the trailing one to three months to determine economic health.

The stock market is inherently forward-looking. Investors look at current conditions – of the economy at large and of the financial health of the consumer and of corporations – and estimate pricing for stocks today based on predictions for the future (typically three to six months in advance).

The market has benefited from Fed policies of low interest rates and a continuation of its quantitative easing approach of injecting liquidity into the financial system by purchasing treasuries, mortgage-back securities, and, recently, corporate bonds. These policies make holding assets in cash unappealing and are designed to drive investors into the market.

The stocks making the largest gains – big companies like Amazon, Google, Facebook, Netflix, etc. – have been largely protected from the current economic conditions. White collar workers can work effectively from home. Online ordering, video streaming, and social media all benefit from consumers sheltering in place. Companies like these dominate in the stock market, pushing the market up at the same time that small businesses are closing their doors.

Waiting for a full economic recovery before putting your money back into the market will likely mean missing out on significant gains.

When and How Should You Get Back In?

The best time to start investing again is almost always “now” – no matter when now is. The perfect is the enemy of the good. Trying to time the market to put your money back in at a hypothetical perfect time is a fool’s bet for most investors. 

To reenter the market, you have two options:

• Put all your money back in today. Stocks rise more often than they fall. Putting all of the money you have waiting to invest into the market today offers the greatest possibility of profit. However, this is a higher risk option – if you are unlucky with your timing, the market could theoretically fall again the day after you invest and stay low for a long period of time. Investors who pulled money out of the market in March 2020 are likely to have low risk tolerance and may find this method too emotionally draining to stomach.
• Reinvest slowly with a dollar-cost averaging strategy. Dollar-cost averaging involves investing a predetermined amount at regular intervals into target assets (regardless of fluctuations in their pricing). If you invest a portion of your paycheck in a 401k plan, you are already utilizing dollar-cost averaging. The same dollar amount is invested in the array of assets you have chosen each month, regardless of the price of any given asset that month. Dollar-cost averaging allows investors to minimize the impact of short-term volatility and avoid the risk of investing a large sum of money at an inopportune time.

Investing in the stock market will always carry some degree of risk. However, as you now know, holding large amounts in cash carries its own risk in losses to inflation and opportunity costs. Before reinvesting your money, make sure you understand that market investing is a long-term game and are prepared not to make the same mistake of selling out should the market fall again. Finding an investment strategy that you can stick to long term, through ups and downs, will allow you to feel good about how your money is working for you no matter how the larger market and economy are doing.

What Should I Do Differently Next Time?

A trusted Financial Advisor can help you re-enter the market and make a plan for the next downturn that focuses on your long-term goals. Having a good Financial Advisor on your side is particularly useful in down markets and times of heightened volatility. Do-it-yourself investing is relatively easy when everything is going up and looks to be going that way for a long time.

When the market is more volatile – say with a global pandemic – a Financial Advisor can help you find the right investment strategy for your financial needs. If you are nearing retirement or will otherwise need to draw down your assets in the short- or medium-term future, a Financial Advisor will help you navigate balancing risk and reward to ensure that you have income available when you need it. 

The best Financial Advisors bring education and experience to the table and are able to review your investments without their judgment being clouded by emotion or fear. It’s undoubtedly scary to see your investments shrink when the market turns down. A Financial Advisor can help you see the opportunities from holding on to an investment long term and can help you find areas to invest that take advantage of the lowered pricing. If you reframe your thinking of a market downturn as a sale on stocks, you are less likely to want to flee the market and more likely to be willing to snap up some bargains.

In a few short weeks, voters in the United States will choose between Democrat Joe Biden and Republican Donald Trump at the ballot box. A deluge of campaign ads from both Democrats and Republicans offer dire predictions for America if the opposing party wins the next four years of the presidency.

With the global coronavirus pandemic still raging in the United States, and Congress deadlocked on the best course of action to support an economic recovery, the 2020 election feels uniquely important to many Americans. In February 2020, the United States economy entered a recession, ending a record 128-month expansion that began in June 2009. The next president, together with Congress, will decide America’s path forward.  

Stock markets main influences are corporate earnings, interest rates, and economic growth. Business cycles, globalization, and unpredictable major events like terrorist attacks or natural disasters all drive the market up and down.  Political events such as the US presidential election cycle can also have noticeable effects on the market.

Stock markets are more volatile in the months leading up to a major election because markets do not like uncertainty. 2020 has been a year of heightened volatility for the stock market, in part due to the normal election year reprising of the potential future administration’s policies. While we do not know how long a coronavirus vaccine will take to go to market or how many other disasters may arise this year, the question of who will be sworn into the office of the presidency come noon on January 20, 2021 will soon be resolved.

How will the stock market react if Biden wins? What if Trump wins a second term? Looking back at previous election cycles and their effects on the stock market offers us some insight.

How Have Previous Presidential Elections Affected the Stock Market?

Portents of doom regarding political opponents are nothing new. Before each election, both parties do their best to convince voters that the market will do poorly under the other side and thrive under their wiser set of proposed policies. The leader in the White House has many opportunities to influence the economy through fiscal policies, spending, taxation, regulation or deregulation, etc. However, our choice of an individual president has less effect on the economy, and therefore on the market, than one might think.

On average, markets may have shown somewhat of a cycle in regard to the presidency, generally performing below average in the first two years of a president’s term and above average in the last two years. Looking at the Dow Jones Index data dating back to 1896:

• Year 1: Average return of 2.4%
• Year 2: Average return of 4.2%
• Year 3: Average return of 10.4%
• Year 4 (Election year): Average return of 6%

On average, based on past data, the first two years seems to yield below average returns.  This might perhaps have to do with a new administration implementing a new agenda and change takes some time. The market may also be waiting to see what policies are going to be proposed and passed leading to greater uncertainty in the early years of a new term.

During the latter two years of a presidency, the president’s policies become clearer (less uncertainty for the market). The party in power begins to think about the next election and focus turns to fiscal stimulus. In the fourth year of a president’s term, election year, the added uncertainty of the next election may show reducing gains.

Interestingly, the correlation also seems to work in reverse.  The market’s performance before an election can be a guide to whether the incumbent party will maintain control. With only three exceptions since 1928, the incumbent party has won the presidency when the S&P 500 has risen in the three months leading up to an election and has lost power when the S&P 500 has fallen. The exceptions are Dwight D. Eisenhower, who was reelected in 1956 despite the S&P falling 3.2%. In 1968 and 1980, despite three months of a rising S&P 500, Richard Nixon and Ronald Reagan beat out incumbents Lyndon Johnson and Jimmy Carter, respectively, to take control of the White House. With a nearly 90% prediction rate, it’s not surprising that parties typically focus on improving market performance in the latter part of their terms.

Of course, it's extremely important to keep in mind that the above patterns are just based on the averages – individual presidencies may defy the trend as many other factors also have significant influence on the market.  As just one example, in 2008, an election year and the middle of a financial crisis, the Dow fell 34% as the subprime mortgage crisis brought on the Great Recession (versus the 6% average gain for election years as a whole).

How Will the Market React If Trump Wins Another Term?

Republicans are thought of as the more market friendly party and we can perhaps expect a positive market reaction if Donald Trump wins the 2020 presidential election. On average, stock market gains tend to be higher when an incumbent party retains power versus when a new party takes the White House. In most cases, an incumbent party, and in particular an incumbent president, is considered a known quantity, though 2020 and this President may be an exception to the rule of continuity.

However, surprisingly, the data seems to suggest that the overall gains could potentially be higher under a Biden presidency. Despite Republicans reputation as the more business-friendly party, market gains historically have consistently been higher (on average) under Democratic administrations than Republican ones.

Republican administrations promote growth by cutting taxes, allowing corporate profits to flourish. In 2017, the Trump administration cut the top corporate tax rate from 35 percent to 21 percent, increasing corporate profits. A Trump administration would keep the lower corporate tax rate in place.  This prospect led to a significant market rally once Trump won the election in November of 2016 that continued well into his term.

Financial stocks in particular might rise after a Trump victory. President Trump, in some cases with bipartisan support, scaled back some of the regulations of the Dodd-Frank Wall Street Reform and Consumer Protection Act and has signaled an openness to continuing to remove regulations in the financial sector. Energy stocks are also likely to do better under a second term of the Trump presidency as Trump continues to reduce regulations on fossil fuel production.

Trump has defied conventional wisdom in many arenas, and indeed the market gains during his first term have been far from typical. Average price gains for the S&P 500 in 2017 and 2019 (years 1 & 3 of the Trump presidency) were well above historical averages while 2018 and 2020 to date have fallen below the averages.

What Changes If Biden Wins the White House?

Whenever a new party takes power, it appears that market gains the first year tend to be more muted so if history is a guide, we can perhaps expect a smaller gain the first year of Biden’s presidency. Nonetheless, if Americans elect Democrat Joe Biden as our next president and historic patterns hold, the markets may rise at a greater pace over his four-year term than under a Republican president.

According to InvesTech Research, annualized total returns for the S&P 500 since 1928 have averaged 13.3% under Democratic administrations. Republican administrations averaged 7.7% annualized total returns over the same time period. Recent administrations have continued this trend – average gains under Bill Clinton and Barack Obama exceeded gains under George Bush Sr, George W Bush, and Donald Trump.

This may seem counterintuitive – Biden plans to raise taxes on corporations and the rich, which cuts into corporate profits and possibly spending by those paying higher tax rates. Increased taxes perhaps allow for increased spending (or investments) in certain sectors like healthcare and infrastructure, which may be helping to offset some of the impact of higher taxes. Democrat administrations generally increase taxes but also increase spending.

Biden has promised a significantly more robust fiscal stimulus plan than Trump has to date. The exact size of the stimulus Biden is able to pass will depend on control of Congress. If Democrats manage to hold onto the House of Representatives and flip the Senate, we can expect higher spending. Just like lower taxes, higher spending stimulates the economy and market for different, but similar, reasons that there is more money available to be allocated.

Clean energy stocks could do relatively better under a Biden presidency as renewable energy becomes a greater priority. Utilities and real estate firms did not see as much benefit from Trump’s 2017 tax bill and would be less impacted from the top corporate tax rate increasing to 28% under Biden’s plan. Infrastructure investment has bipartisan support and a large bill could rally industrial and material company stocks. Healthcare may also be poised to rise under a Biden expansion of the Affordable Care Act, although the details of the eventual bill itself will ultimately determine which stocks gain the most.

Is the 2020 Election Unique?

2020 has been a unique year in modern American history. A global pandemic, increasing partisan polarization, social unrest, and several natural disasters have made 2020 a year to remember. An expected record number of mail-in ballots mean we might not know who won the Electoral College until several weeks after Election Day. However, come January 20, the next president will be sworn in and life will go on and markets will adjust either way.

In Sir John Templeton’s wise words: “The four most dangerous words in investing are: this time it's different.” Investing is a long-term game. While it’s tempting to focus closely on the presidential election, doing so can mean you’ll miss the forest (larger market trends) for the trees (the politician du jour). Investors making smart decision can continue to make long-term financial gains regardless of whether the market is rising or falling or who controls the presidency.

Investing for the long term requires a comprehensive understanding of the risk and likely return of potential investments and how those investments correlate to your situation and objectives. Talk to a trusted advisor to make sure that your investments are the right choice for you. A good advisor will keep abreast of potential implications of the election cycle and the political winds on your portfolio so that you can focus on what matters most to you.

High performers in every field share some common attributes.  One of these is that they almost always seek out experienced coaches and advisors who help them achieve high performance in the first place.  Examples of high performers in various areas who work with coaches to reach or maintain high levels of performance includes:

• Olympic Level Athletes like swimmer Michael Phelps
• Elite Golfers like Tiger Woods and Rory McIlroy
• Top Fortune 500 CEOs like Indra Nooyi and Meg Whitman
• Wealthy founders of companies like Facebook and Google

As an Investment Advisor, one of the most enjoyable parts of my job is in educating and coaching my clients. Beyond the foundational work that we do in managing and growing their investments, we often guide clients through questions or issues related to entrepreneurship and financial or even life and career options.

As a financial coach, I can often see things they have missed, bring perspectives that clarify the choices at hand, and help my clients narrow down the right decision under the circumstances for them by asking diagnostic questions and helping weigh the pros and cons of each choice using the experience we bring to the table.

The American Dream says that anyone can work their way from nothing to become successful.  However, almost no one achieves success by themselves.  Hard work and talent focused in the wrong area will inevitably lead to failure.  The cost of even one error, if it is big enough, can be extremely high and delay the achievement of goals by years or perhaps even place them out of reach forever.  Correspondingly, the ability to sidestep risks and find the most efficient way to achieve objectives can be invaluable.

So why is it that even the most intelligent, best educated, naturally talented, hardworking and driven people still seek out coaches and advisors to succeed?

I recently learned about Solomons Paradox, and it holds the key to explaining why all these high performers and all of us as well can benefit from the right coaches and advisors if we wish to achieve our own goals.

What is Solomon’s Paradox?

King Solomon, the biblical king from the Old Testament, reigned over the consolidated Jewish kingdom from circa 970 to 931 BCE. Solomon was considered the wisest of kings and people would travel from near and far to seek his advice and mediation.

In the biblical tradition, young King Solomon has a dream where the Lord offers him anything. Instead of choosing money or power, Solomon asks for the wisdom to discern between good and evil with integrity. God is pleased with his request and grants him the wisdom to judge for his people.

In one of Solomon’s best-known judgements, two women came before the king to seek his help with a custody dispute of a newborn child. Both women had recently given birth to baby boys, one of whom had died, and both women claimed the living child as their own. Solomon sent for a sword and ordered the child cut in half, so that each woman could have a share. One woman readily agreed while the other begged him not to kill the boy, saying she would rather give the baby to the other woman to save his life. Solomon ruled that the woman willing to give up the child was the true mother and she was reunited with her little boy. The story spread throughout the United Monarchy and was retold as a sign of Solomon’s wisdom and justice.

While many of us know the tale of Solomon’s wisdom in the affairs of others, few realize that he seldom showed good judgement in his own personal life. Some examples of his personal bad judgement include his decisions to hoard vast amounts of wealth and build an extravagant palace on the backs of countless slave laborers. He also had hundreds of wives and concubines, many of them from foreign lands, and allowed his wives to bring the worship of their gods to his home (considered idolatry in ancient Israel).

Perhaps most egregious in his recounted failings, Solomon failed to prepare his son and heir Rehoboam to become a wise king. When Solomon died and Rehoboam took the throne, Rehoboam ignored the advice of his own advisors and dealt harshly with his people. His tyranny led to the end of the United Monarchy, where the Kingdom of Israel broke free of Rehoboam’s rule in the north and Rehoboam ruled the southern Kingdom of Judah alone. The culmination of Solomon’s lifetime of bad personal decisions ruined his once great kingdom.

The contrast between Solomon’s sage public judgements for others and the lack of wisdom in his personal life is Solomon’s paradox. Why was the wise King Solomon unable to apply more of his wisdom to his own personal choices and goals?

Does Solomon’s Paradox Still Apply? 

King Solomon lived nearly 3000 years ago. Entire empires have risen and fallen in the intervening years. Inventions ranging from the printing press to electricity and the Internet have transformed our daily lives. We now have access to the collective knowledge of the human race on a device we carry around in our pocket. With all the available information and advantages of the modern era, it’s might seem that the folly of an ancient king may no longer be relevant.

Igor Grossman, a professor of psychology at the University of Waterloo in Ontario, set up a series of experiments to see if Solomon’s paradox was still a factor today.  He wanted to measure if people were indeed better at giving advice to others than in evaluating and giving themselves the benefit of that same judgement ability.

Grossman’s studies found that:

• We are able give our friends better advice because of our relative objectivity. Participants imagined that their friend’s long-term romantic partner had committed infidelity. The participants were able to stay clearheaded and give well-reasoned advice.
• We give ourselves poor advice or don’t follow our own good advice. When those same participants imagined that it was their own long-term romantic partner who had committed infidelity, their responses were clouded by emotion and less reason than when it was a friends circumstances
• We don’t get wiser with age. Older participants (60-80 years old) fared no better at managing their emotions than young participants (20-40 years old) when dealing with a personal betrayal. Older folks may have more experience and a wider knowledge base but they are just as susceptible to Solomon’s paradox as the rest of us.

As poor Alice noted in Lewis Carroll’s Alice’s Adventures in Wonderland “I give myself very good advice, but I very seldom follow it”. 

Solomon’s paradox is not unique to the ancient era. There are countless examples of historical figures who would have benefited from their own good advice. In an early draft of the Declaration of Independence, Thomas Jefferson denounced slavery as a “cruel war against human nature itself, violating its most sacred rights of life & liberties” yet Jefferson owned hundreds of slaves himself.

Author George Orwell’s 1984 warned of the dangers of Big Brother, yet Orwell compiled a list of what he viewed as problematic writers for the British anti-communist International Research Unit in 1949.

Even today, we can find many examples such as politicians who sabotage their political chances through irresponsible extramarital affairs and many others.

Of course, Solomon’s paradox doesn’t just apply to the rich and famous. Plenty of average people make terrible choices that they would never encourage a friend to make – impulsive relationship decisions, hearsay driven investments, or merely giving up after a temporary setback.

How Can We Avoid Solomon’s Paradox?

Luckily, we are not powerless against Solomon’s paradox. Simply being aware that the paradox exists can help to a degree. Practicing psychological distancing by reframing decisions as if we were deciding for a dear friend can help us to remain more objective.

Instead of asking yourself “Should I have that last slice of cake?”, ask from a third person perspective “Should he have that last slice of cake?”. The simple pronoun change can help you focus on facts - I’m not hungry and am trying to cut back on sugar – versus feelings created by emotions and short-termism.

Wisdom is the quality of having experience, knowledge, and good judgment. Practicing psychological distancing helps us to make more rational judgements but is insufficient in areas where we may not have the right experience or knowledge. If some of the necessary components of wisdom are absent, and especially when the decisions are complicated, your unaided decisions are still likely to yield poor results.

In these cases, finding a good mentor, coach or advisor who has the right education, experience and ability to supply the missing components of wisdom from a more objective third person perspective can help you reach your goals in just about every area of your life far more efficiently.

Very high performers have not just one, but multiple advisors that they rely on to perform even better. A pop star might employ an agent, voice coach, stylist, nutritionist, personal trainer, and dance coach to continue rising in their career.

For those of us not blessed with Shakira’s voice and dancing talent, we can still benefit from advisors in certain areas of our lives:

• Relationship counselors assist couples with communications and trust issues that would lead to divorce if unchecked
• Personal trainers and/or nutritionists can help individuals with health challenges that can literally add years or even decades to your lifespan
• Investment advisors help you multiply your money and freedom without doing any more work yourself
• Business and career coaches can help you achieve greater growth in income and profitability from your work

As with all the above examples, even in things in which we have a good knowledge base and prior experience, a qualified outside observer can help us more clearly evaluate all the options to make the optimal decision and avoid needless mistakes. This is why top CEOs still employ executive coaches despite their own credentials. The unique vantage point of an outside advisor can help us grow and prevent unnecessary stumbles in whatever arena we employ them.

What Does this Mean for Investing?

Investing, and financial health in general, is one area where almost everyone can benefit from a good advisor. Financial markets are complicated and forever changing. Money decisions are inherently personal and clouded by emotions and past experiences. Loss aversion is deeply embedded in the human psyche, even when a small loss will eventually lead to powerful long-term gains.

As an investment advisor, I often help my clients counterbalance their instincts in the achievement of their financial goals and portfolios.

When seeking a great investment and financial advisor, its important to be thorough and find a worthy coach, so take the time needed to look for someone with:

• Experience – You want an advisor who has a history of achieving the results you want to achieve. I founded Ridgewood Investments in 2002 after seven years on Wall Street and am proud of the transformational results I have achieved for my many clients over the past few decades.
• Education – As with any field, education is important.  Many advisors work more as salespeople than anything else and their educational backgrounds reflect this focus. I have always been surprised when I run across clients who themselves are far more educated and thoughtful than their current “advisors” whom they turn to help them figure out what to do with their savings and financial decisions.
• Knowledge – The best advisors are always seeking to expand their knowledge and find new ways to make sure that calculation, not emotion, rules the day.  They write and create content to educate others around the many details and nuances needed to make good decisions.
• Courtesy and Responsiveness – This should go without saying, but your advisor should always treat you with courtesy and respect.  They should be available and responsive if you have questions or need to reach them.  At Ridgewood Investments, we believe in educating, not selling. Our skilled advisors provide exceptional service and responsiveness.

Being aware of Solomon’s paradox and finding ways to avoid its reach by harnessing great coaches and advisors is a key step in the journey to achieving your personal, financial, and professional goals.