I found this article very interesting; and although most of us can only dream of a portfolio valued at over ten million, I thought the way of thinking was interesting no matter what range we are in….Like the author says “who wouldn’t want to learn from those who have already made it?”

Financial Advice Gleaned From a Day in the Hot Seat

nytimes

PAUL SULLIVAN,
On Friday June 24, 2011, 1:03 am EDT

WHEN I started writing this column almost three years ago, one of my goals
was to figure out what the wealthiest Americans knew and pass along those
lessons to middle- and upper-middle-class readers.

Recently, I put that idea to the test, spending the afternoon in a Manhattan
town house with eight wealthy men who are all members of an investment club
called Tiger 21. I was there to hear an unvarnished critique of how my wife and
I save, spend and think about money.

Each of the 180 members of Tiger 21 has a net worth of at least $10 million,
pays $30,000 in annual membership fees and commits to spending one day a month
with other members. Nearly all of them made their money — they didn’t inherit it
— and most are men.

I had asked to sit in on one of the group’s signature sessions, the portfolio
defense, but a few weeks ago, the members invited me to be in the hot seat. I
jumped at the chance. Beyond looking at how money is invested, the portfolio
defense is intended to force members to discuss their wealth in the broadest
terms.

I had heard horror stories. One member was told he needed to lose a lot of
weight if he was going to get people to invest in his new fund. Another was
chastised for telling his children that he had lost his money in the financial
crash so that he would not have to talk to them about his immense wealth.

Michael Sonnenfeldt, the founder of Tiger 21, used the term “carefrontation”
to describe what happens in a portfolio defense. The assessments are meant to be
direct, unsettling and possibly painful to hear, Mr. Sonnenfeldt told me. But
the goal is to get members to think differently about what they are doing with
their investments and about everything in their lives that is affected by their
wealth, from their family to charities.

“It’s not meant for the faint-hearted,” Mr. Sonnenfeldt said. “This is a
process that some people could clearly find offensive or discomforting.”

What I experienced was rough, but it was also thought-provoking. The value to
me — and to anyone given a similar opportunity — was that the members challenged
everything about my assumptions on saving and spending. Here’s some of what I
took away.

OUR MISTAKES In the week leading up to this, I worked
with Joel Treisman, an executive coach and the chairman of one of Tiger’s 17
groups, to gather up all of our financial reports.

I was confident that the group would think my wife and I were in good
financial shape. We save a good percentage of our income. We don’t have any debt
beyond mortgages and a car payment. We probably spend a bit too much on food and
pet care, but we don’t run up credit card bills to do it.

The members were warm and welcoming as we filled our plates with poached
salmon, grilled asparagus and buffalo mozzarella from the buffet. But as soon as
we were seated, it was all business. And I was immediately on the defensive.
There were two big surprises but also blunt advice and some thoughtful questions
about our portfolio.

First, the surprises. The group agreed that we did not have enough life or
disability insurance. We both have insurance that would cover about three or
four years of earnings if one of us died. This seemed sufficient to get past a
few years of sorting things out. The group disagreed. Going from two incomes to
one would mean a radical rethinking of our life.

We needed more sizable policies to give us the freedom to sort through
things. Though we both carry disability insurance, the policies are old and do
not reflect our current income. They would also cover only 50 to 60 percent of
our old base salaries. The members thought we should buy individual policies to
add to this.

The second surprise was about our savings. We have been saving about 15
percent of our post-tax income. Alan Mantell, a lawyer who made his money in
real estate, development and investment, said the issue was not how much we
saved but how we thought about spending.

“You need to ask, ‘What can I afford to spend versus what do I need to
spend?’ ” he said. We could be saving more money for retirement — or in case
something bad happens — if we cut back on things we did not really need, he
said.

All the members agreed that we should sell our vacation condominium. “You
need to become more liquid,” said Thomas Gallagher, the former vice chairman of
CIBC World Markets. “If something bad happens, it’s easy to get rid of a dog
walker; it’s hard to get rid of a house in Naples.”

Florida real estate is in a sad state, so I asked what they would do with an
offer that was less than our mortgage?

“Take it,” Mr. Gallagher said. “Write the check and be done with it.”

As for our portfolio of stocks and bonds, the questions were more basic.
Leslie C. Quick III, whose money came from Quick & Reilly, the discount
brokerage firm, looked at our investments — 50 percent in equities, 34 percent
in fixed income, 12 percent in commodities and real estate and 4 percent in cash
— and wanted to know how our investment manager had done in the bear market. He
also thought we should ask our adviser how he balances the risks in our jobs
against those in our portfolio.

OUR SOLUTIONS Because I had parachuted into Tiger 21 for
one meeting, I was taken aback by the group’s brutal honesty. I walked out after
three hours in a daze. Over the next couple of days, though, I concluded that
the members had made some great points.

Some solutions were simple. We can increase our term life insurance for
comparatively little money — $1 million of term life costs about $700 a year.
Individual disability policies cost more. Barry Lundquist, president of the
Council for Disability Awareness, said the yearly premium would usually be 1 to
3 percent of a person’s salary, but the payout would still be limited to a
percentage of that person’s income.

As for our portfolio, I put the questions to our adviser, K. C. King of
Emerson Investment Management. I liked that he did not sidestep the bear market
question: Emerson’s portfolios did better than the benchmarks in 2008, but they
lost value like everything other than cash, gold and Treasuries.

Where I took comfort, though, was in how he thought about our portfolio.
“We’re very mindful that what we’re managing for you and most of our clients is
their core portfolio,” Mr. King said. “If someone said from the Tiger group that
this is fairly conservative and you’re not taking big swings, we’d say you’re
right. This is the portfolio that we’re trying to keep for your daughter’s
education and into your retirement.”

The issue that Mr. Mantell raised about spending is the thorniest one. My
wife and I are under no illusions that having a condo in Florida makes financial
sense. Trimming spending in other places is easier: Walking the dogs ourselves,
for instance, would save $100 a week or $5,200 a year.

In the end, though, there are such radical differences between the wealth of
the Tiger members and most Americans that some of their advice could not
apply.

Mr. Sonnenfeldt estimated that 90 percent of Tiger members had paid off the
mortgages on all of their homes.

They also tend to view money as something to preserve rather than accumulate.
Mr. Sonnenfeldt said members spent about 3 percent of their wealth annually,
which allowed the principal to continue to grow. But at the $10 million entry
level, this would mean $300,000 a year.

Perhaps most important, none of the members became rich by eating out less.
They became rich by working in industries that paid extremely well or by
building businesses that they later sold.

Still, what was best about the session was that no one pulled any punches.
Their honesty forced us to think hard about the assumptions we were making. Yes,
it was difficult. But really, who wouldn’t want advice from those who have made
it?

 

http://finance.yahoo.com/news/Financial-Advice-Gleaned-From-nytimes-3488361631.html?x=0

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