How Dad Won Mom’s Blessing To Manage Their Retirement Money

Dad had to beat the mutual funds mom picked to earn her blessing to manage their money 

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When my dad retired, his plan was to manage my parent’s retirement accounts on his own. My mom didn’t want a rookie investor to manage their money so she agreed to let him do so only after dad showed her he could do better than the best mutual funds she could find. Here’s how my dad beat the mutual funds mom chose.

My father worked at the Bank of Hawaii for 30 years. Throughout his career, he kept a list of the people in his industry who were the best at what they did: recruiting talent, closing deals, creating new products, etc.

In 2000, my now retired father saw that a new instrument called a collateralized mortgage obligation (CMO) would make it easier for banks located where loan demand was high to sell their loans so they wouldn’t have to stop lending. When he worked for the Bank of Hawaii, it was his responsibility to sell “excess” loans so he knew this part of the business well.

After paper-trading for a few years, my dad put some real money to work in the middle of 2002 investing in J.P Morgan at $12, Goldman Sachs at $55, Wells Fargo at $13 and Citibank at $280. At the end of 2004, J.P. Morgan was up 116% at $26, Goldman Sachs up 60% to $88, Wells Fargo up 54% to $20, and Citibank up 59% to $446. And, these returns don’t include the dividends.

However, in addition to knowing which stocks to buy and when to buy them, a seasoned investor also has to know when to sell.

In 2006, my dad saw that banks were making no-money-down mortgages without verifying the borrower’s income. To him, this was a signal of declining credit quality. The only way these loans made sense to him was if the banks made all their money up front from origination fees and carried none of the risks of default — which turned out to be exactly the case.

Even though many CMOs were rated triple-A, dad didn’t think it was a good idea to lend money to people without regard to their ability to pay it back and he didn’t want to invest in banks that would originate or buy such loans.

He started selling his bank stocks in mid-2007 and was out by the end of that year. In hindsight, he was a little early. Lehman Brothers did not collapse until September of 2008.

My Take: Like my father, I think many assume that upon retirement their spouse will be comfortable having them manage their investments on their own. Since most people don’t have a lot of experience managing money, it understandable why the spouse might not like that idea. I think the process my mom and dad went through to resolve the issue makes sense, but it required my mom to stand up for herself which put a lot of stress on her. Mom didn’t want their investments to be managed by a rookie investor — even if it was my dad — and she was right.

My dad’s career in banking made him an industry expert. From 2002 to 2007 dad averaged 25% a year beating all of the mutual funds my mom had picked and earning mom’s blessing to manage their money.

Dad’s most valuable resource was his list of the best people in his industry. These were the real experts about what was going on in the banking industry. Dad was smart to invest in his field of expertise. Many people invest in companies they know nothing about in the name of diversification. In his view, if you want to invest in an industry you know nothing about, find a manager who has expertise in that industry. Doing it yourself is likely to make your portfolio riskier, even if it is more diversified. Dad was also smart to go to cash when he couldn’t find anything he really liked within his field of expertise. Too many investors believe they have to be almost fully invested all of the time.

If my parents were having this discussion today, I think I could have helped my mom choose managers that would have been harder for my dad to beat. In addition, opportunities in the Financial sector are very different today than in 2002. It’s possible that dad would not be able to find opportunities in the Financial sector today that played to his strengths as much as the CMOs did. If that were the case, I think dad would have agreed with mom to find managers to invest their money in other areas.

If my parent’s story has resonated with you, please let me know. It would make me happy to know that their experience might have been helpful to others.

This is part 3 of my parent’s story. Click here to see part 1.

This article is part of a series I write for those who want to get their portfolios back on track. To be notified when the next installment is published, click here.

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