An Investor’s Challenge – Managing Parents’ Assets

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For many reasons, independent parents can become dependent on their children, especially when it comes to money. My personal experience has taught me that taking on the investment parenting task is not just about applying one’s own approach to investing.

The major challenge in doing the right thing is to understand all that led up to the “now”. You have to put yourself in the parents’ shoes to understand what the goals and restrictions are and why they exist. Here is my experience as an example:

Put yourself in their place

My father passed away in 2006, having built a nest egg as a lawyer and real estate investor. (He tried stocks once, but didn’t like the volatile daily valuations.) At the time of his death, the real estate had been sold and all assets were invested in the “risk-free” Vanguard Treasury Money Market Fund. . After his death, my sister and I were in a position to replace him on behalf of our mother, unable to manage the finances. My sister took care of the daily activities and I took care of the investments.

Given that my expertise was in full portfolio management, particularly equities, it might seem natural for me to move assets around to produce higher returns. However, my father’s story came to mind, so my sister and I decided to continue with his risk-free approach unless conditions dictated a change. Over the years, I’ve periodically asked our dad if he’d like me to choose a balanced or Vanguard equity fund for some of his cash, but the answer was always “no.” His background made this answer reasonable and understandable.

Start by focusing on the story

When his father died in the late 1920s, he became “man of the house” as the eldest (eleven) of three brothers during the Great Depression. As such, he had to do odd jobs to help support the family. When the United States entered World War II, he joined the army, going first to the Aleutians and then to Belgium. He told me that in the Aleutians (while standing in the mud, shivering in the cold and fighting off the only mosquito inside his mosquito net) he had decided on a career after the war.

So after the war he went to college and then to law school on the GI Bill. After passing the bar exam in 1951, we moved from Los Angeles to a small town in San Diego County, where he set up his practice. He told me later that after a few weeks without customers, he was worried about having to borrow against the car to pay the bills. But then a widow asked him to write a will. His fee of $50 (about $500 in 2022 dollars) eased his concerns and launched his business.

And then ? Decades of planning and action, building and repairing, anticipating and reacting, saving and spending. In other words, a busy life that included going from zero in assets to the current nest egg that could sustain them.

Next: Determine the investment objective

Looking back, my sister and I realized that the main purpose of these assets was to provide income, as well as social security payments, for our mother’s health and well-being in the future. At that time, in 2006, the Vanguard money market fund was paying around 5% in interest income, hitting that target.

So we agreed to continue our father’s approach to investing unless there was a good reason to change.

Soft sail, then torments

Everything was fine for two years. As the stock and bond markets entered their difficult times before the Great Recession, we were happy with the decision we had made. However, conditions began to undermine the approach. In 2008, the yield of the Vanguard Treasury Money Market Fund fell from 4+% to 0+%. From sufficient income to nothing.

Obviously, it wasn’t just this money market fund that fell out of bed. When Fed Chairman Ben Bernanke put silver on sale at 0%, he turned off the income tap for millions of savers and countless organizations that depended on secure income. Here are the returns from the Vanguard Treasury Money Market Fund that reflected Bernanke’s fed funds rate change…

Year – Yield – Income from $100,000

  • 2006 – 4.95% – $4,950
  • 2007 – 4.76% – $4,760
  • 2008 – 2.10% – $2,100 (return went from 4+% to 0+%)
  • 2009 – 0.25% – $250
  • 2010 – 0.01% – $10

The chart below shows the action as Bernanke’s fed funds rate fell from 5-1/4% in the fall of 2007 to 2% a year later. Then, down to 0% in the winter of 2008.

The “Great Reaction” – Not to the Great Recession, but to Bernanke’s 0% experiment

At the bottom of the stock market in March 2009, (as “skill” and good fortune would have it), I moved assets from other accounts into stocks. However, even as our mother’s income needs were now met through capital payments, my sister and I decided to stick with our father’s strategy. I certainly thought that with the financial system out of the woods, Bernanke’s Fed would soon allow rates to return to market-determined levels.

However, in October 2009, Bernanke’s mantra (yes, things are better, but they are not good enough) began. Barrons tried to shake the tree with “Come on, Ben. give them a break“, but to no avail. Obviously, the return of a proper safe interest rate was not imminent.

Therefore, my sister and I decided it was time to break with tradition to stop capital flight. As a result, I started building a portfolio of stocks and stock funds. Slowly, the capital level stabilized and then began to grow, supporting our mother until her death in 2015. (Without making the switch, her assets would have been significantly depleted over the six-month period. year.)

The essential: two lessons

First, long-term investment strategies rarely hold up over time. Things happen and, like it or not, changes have to be made.

Second, the Federal Reserve is not prescient. Even now, he continues to carry out Bernanke’s flawed 14-year experiment of ignoring the role of the capital market in setting interest rates. (Left to its own devices, the US 3-month Treasury rate would be around 5% – not today’s “new high”, but a measly 2.6%.

When this experiment finally comes to an end and the capital market is once again fully responsible for setting interest rates, the misshapen history we lived through will be compartmentalized, analyzed, assessed and rightfully critiqued.

The worst fallout from what happened is inequality and the damage done to all who depended on secure interest income. The total amount of assets involved was several trillions of dollars. Most of the people and organizations involved were unable or unable to do what my sister and I were able to do – move into riskier assets without being taken on by the underlying risk.

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