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View from the Valley

Silicon Valley can sound like a wild place, where young entrepreneurs routinely earn—and lose—vast fortunes, new companies are constantly forming and home prices march ever upward. However, the financial-planning challenges facing its inhabitants would be familiar to many investors, regardless of where they live.

From her office in Menlo Park, California, Schwab Financial Consultant Tracy Zhang has witnessed the region’s dynamism firsthand. In her 22 years at Schwab, she has worked with scores of investors, among them the entrepreneurs and programmers one might expect to find in Silicon Valley, but also plenty of lawyers and doctors.

No matter her clients’ backgrounds, Tracy often finds herself circling back to four investing pitfalls that seem to pop up repeatedly.

“You can be a dot-com multimillionaire or a school teacher trying to save for retirement—people seem to trip over the same issues,” Tracy says.

So what are those issues?

Overconcentration

Silicon Valley is the epicenter of the technology world, and Tracy has many clients whose portfolios are dominated by technology holdings. Sometimes that’s not intentional. Clients occasionally receive stock in their companies, and if that stock rises sharply, it might occupy an oversized place in their portfolios. Other times, investors might simply have invested in what they know, whether it’s a product or the result of a personal connection to a particular company.

Why might this be a problem? It’s always risky to concentrate your portfolio in one stock or even one sector. All companies, no matter how strong, can be affected by unique circumstances, such as strikes, lawsuits, natural disasters or simply poor business decisions. Good companies can be pulled down along with the rest of their sector during market downturns.

Some financial analysts recommend that no single stock account for more than 5% of your stock portfolio. Accumulating such a concentration is easier than you might think, though, especially if you get stock grants from your employer.

Avoiding overconcentration is especially important when you are counting on the same company for investment returns and a regular paycheck. If your employer hits a bump, you could be laid off and lose portfolio value at the same time. In the worst case, the company could go out of business and take a chunk of your retirement savings with it.

To help her clients over this hurdle, Tracy likes to illustrate the merits of diversification. Having a variety of investments in different asset classes can help reduce risk, especially if a stock doesn’t work out as expected or if the sector endures a downturn.

“Diversification is also about upside potential, enabling investors to capture gains in investments they may not have considered,” Tracy says.

No roadmap

Many of the people Tracy meets on the job—even those with extremely high incomes—come in without a plan for putting their money to use. One person who became a client, a corporate attorney, was earning as much as $500,000 a year, after factoring in his annual bonus. But he still had cash flow issues—and wasn’t saving for retirement.

“Planning is an issue for people regardless of their income levels,” Tracy says.

A recent study found that almost three in five Americans believe their financial-planning efforts need improvement and 34% have done nothing to plan financially for the future.1 This is unfortunate, as research has shown that investors who plan tend to experience significantly better results than those who don’t. Those who stuck with their plans accumulated three times as much wealth, according to one study.2

“It’s remarkable, but many people don’t realize just how much they are spending and how much they could be saving by establishing a plan,” Tracy says.

Her first step when introducing a client to planning is to get down to basics. She works with clients to write down goals, track expenditures and ensure that they are saving for retirement and often college for their children.

“It’s a fundamental step that every investor should be taking,” she says. “Taking time to set a plan can really help provide the discipline to ensure that you’re living within your means—even if those means are very high.”

Sitting on the sidelines

Occasionally, Tracy hears from clients who are concerned that the investing environment is too hot or too volatile and are thinking about pulling their money out of the market.

“Some are concerned that technology valuations and the market as a whole are too high,” she says. “Others just don’t like the ups and downs and don’t feel comfortable with the volatility.”

But no one can predict the future course of the market, and not being invested can mean missing out on major gains. Consider this example: Markets were volatile between the end of 2008 and the middle of 2012, and many investors pulled money out of the market. During that period, investors pulled $260 billion out of mutual funds that invest in U.S. stocks.3 However, those who stayed out of the market missed the second-biggest rally since World War II.4

Tracy reiterates that moving money in and out of the market could mean missing out on some of the best days, which can hurt long-term results.

“Timing the market is nearly impossible even for the most experienced investors,” Tracy says. “So I work with clients to determine how much risk and volatility they can stomach and we create investment plans that will keep them invested and sleeping at night.”

Real estate rich

Since 2001, Americans have been putting an increasing amount of their wealth into housing. The wealthiest 10% of households have about 35% of their wealth invested in real estate. For the middle 50% of households that figure rises to about two-thirds of their wealth.5

In Silicon Valley, one of the country’s most expensive housing markets, this trend is even more pronounced. As a result, many of Tracy’s clients have a lot of wealth tied up in real estate. This is partly a problem of overconcentration, but it can also be a planning problem.

“Real estate is another area where investors need to ensure that they are not concentrated,” Tracy says. “Many of my clients are reluctant to sell because they want to avoid the tax liability, but holding onto a property may mean that they aren’t well diversified and aren’t preparing for retirement.

“We work through scenarios that include exit strategies for getting out of property and into other income-generating investments,” she adds.

Over her years working in the Bay Area, Tracy has not only seen the region’s booms but also the swoons. That experience helps when she works through long-term plans with her clients.

“Having lived here through the ups and downs helps me remind people to stay diversified and think about the long term,” she says. “Also, it’s a reminder for me and my clients to keep our eyes on the plan and make changes as goals and needs change.”

“These aren’t set-it-and-forget-it relationships. Rather it’s all about helping clients navigate through their investment lives.”

1Anna Robaton, “Study: 33% of Americans Have No Financial Plan,” CNBC.com, 4/29/2015.

2Annamaria Lusardi and Olivia S. Mitchell, “Financial Literacy and Planning: Implications for Retirement Wellbeing,” NBER Working Paper Series, 5/2011.

3Adam Shell, “Invest in Stocks: Small Players are Still Smarting,” USA Today, 5/7/2012.

4Steven Russolillo, “Bull Market’s Five-Year Anniversary, in Five Charts,” The Wall Street Journal, 3/4/2014.

5Allison Schrager, “The Hidden Reason for Americans’ Shrinking Wealth,” Bloomberg, 7/29/2014.

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Important Disclosures

Past performance is no guarantee of future results.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

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