Friday thoughts - What does the academic enrollment scandal and the Empire star's fraud have to do with your investments?

What does the academic enrollment scandal and the Empire star’s fraud have to do with your investment portfolio?

More than you think.

There have been several large scandals that have broken in the early part of this year. For those who are totally tuned out of the news cycle, Jussie Smollett, a star from Fox’s hit show “Empire”, made an allegation in January that he was attacked by two white men while they made racial and homophobic slurs, they poured bleach on him, and hung a noose around his neck. After investigation, however, it turns out that he made it all up in order to get sympathy and attention with the hopes of getting a better contract for upcoming episodes of his show.

Several weeks ago, another massive scandal broke when the US Attorney’s Office indicted 50 people in a national college admissions cheating scam. Wealthy and famous parents were paying a “service” to help their children cheat in admissions tests and/or claim they were being recruited as athletes in order to jump ahead in the admissions lines of elite universities. The reality is that these test results and athletic abilities weren’t really there, but that didn’t matter to the parents. They wanted their children to get into these institutions and would do whatever to took to get them in; even if it meant lying.

While these two frauds don’t seem related, they share one common thread - a person, or family, wants the rewards they feel they deserve, without having to do the real work to get those rewards.

I think this has been a societal problem that has been building for a while. I remember getting a trophy at the end of little league football when I was in the 8th grade. Our team was awful and I was not very good. That trophy was an insult to me because I didn’t earn it. Unfortunately, these types of participation trophies have only become more prolific in the name of wanting to honor and reward everyone, not just the high achievers.

The introduction of social media has just accentuated the problem. Now, it’s easier to present this false narrative of the “perfect life”. Of course everyone want’s to put their best image out to the public. That means that we don’t share the pictures of the kids throwing a fit because you served their cereal in a green bowl instead of the blue one. And you don’t post pictures taken near where the dog sleeps because he sheds and there is too much hair over there. We only share the perfect meal or the best of 20 pictures of the kids before church. The persona we put out on social media there isn’t the reality of our daily lives.

This leads to people struggling with comparison issues. They see everyone else living this ideal life and they can’t figure out what they've done wrong to keep from having that life. I have no way to prove it, but I suspect this is why we’re seeing more people dealing with depression and anxiety then ever before.

Ok, ok. What does this have to do with your investment portfolio? I think we are struggling with comparison issues with our investments, too. For the last several years, the number of people asking me why they didn't beat the S&P 500 has increased exponentially. We want to get great returns on our money, but we don’t want to lose when things go south. We want our cake and to eat it too. Unfortunately, it doesn’t work that way in the real world. In order to get better than average returns over time, you must take higher risk than average. And when you take higher risk, you are more susceptible to losses when things go down.

There are ways to lower risk of losses in a downturn, such as increasing allocations to things like bonds, international investments, real estate, and commodities. But that is no guarantee of protecting you from losses and it will probably mean that your portfolio will underperform other investments and shocker here - your neighbors, friends, family, or coworkers at times. This is especially the case when you look at things in a shorter time frame, such as a few months or a year or two.

My suggestion is to focus on your own situation and your own reality. What do you have in savings, retirement accounts, and debt? When do you need to turn those savings vehicles into an income stream? What do you need to generate in income from those savings? Now look at how much you need to grow or protect those investments to generate the income you need.

Try not to get too worried about what the guy on TV says the markets will do when the Federal Reserve raises or lowers rates. Or what your cousin says he earned in his 401k last year. Here's the reality - the guy on TV has no clue as to what will happen (it’s a guess), and your cousin may have gotten lucky with a good guess of the best fund last year.

Let’s all work to try not to compare our lives to the fake lives on social media and TV. Instead, I am going try to focus on living the best life I can today, and I encourage you to do the same. If you would like to sit down and talk about how to step back and get a realistic look at your situation, please let me know.