An Investor’s Challenge – Managing Parental Assets

For many reasons, independent parents can become dependent on their children – especially in money matters. Personal experience taught me that taking over the parental investing task is not a simple application of one’s own investment approach.

The major challenge to doing the right thing is understanding all that led up to the “now.” It requires getting into parental shoes to understand what the goals and restrictions are and why they exist. Below is my experience as an example:

Getting into their shoes

My father died 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.) By the time of his death, the real estate had been sold and all assets were invested in the “no-risk” Vanguard Treasury Money Market Fund. After his death, my sister and I were in the position of filling in for him on behalf of our mother, who was unable to handle the finances. My sister took over the day-to-day activities, and I took over the investing.

Since my expertise was in full portfolio management, particularly stocks, it might seem natural that I would shift the assets to produce higher returns. However, my father’s history came to mind, so my sister and I decided to continue his no-risk approach unless conditions produced the need to change. Over the years, I periodically asked our father if he’d like me to pick out a Vanguard balanced or stock fund for a part of his cash assets, but the answer was always, “no.” His background made that response reasonable and understandable.

Start by focusing on history

When his father died in the late 1920s, he became the “man of the house” as the eldest (age eleven) of three brothers during the Great Depression. As such, he had to do odd jobs to help support the family. When the U.S. entered World War II, he joined the army, going first to the Aleutians, then to Belgium. He told me that in the Aleutians (while standing in the mud, shivering in the cold and battling the one mosquito inside his face netting) he decided to make a post-war career for himself.

So, after the war, he went to college, then law school on the GI Bill. After passing the bar exam in 1951, we moved from Los Angeles to a then-small town in San Diego County, where he set up his practice. He told me later that, after a few weeks of no clients, he worried that he may have to borrow against the car to pay the bills. But then a widow asked him to draw up a will. Her $50 fee (about $500 in 2022 dollars) quelled his concerns and launched his business.

What next? Decades of planning and doing, building and repairing, anticipating and reacting, saving and spending. In other words, a full life that included going from ground zero in assets to the current nest egg that could support them.

Next: Determining the investment goal

Thinking back, my sister and I realized the primary goal of those assets was to provide the income, along with Social Security payments, for our mother’s health and well-being into the future. At that time, in 2006, the Vanguard money market fund paid about 5% in interest income, meeting that goal.

So, we agreed that we would continue our father’s investing approach, unless there was a solid reason to make a change.

Smooth sailing, then turmoil

All was good for two years. As the stock and bond markets began their rocky periods going into the Great Recession, we were happy with the decision we had made. However, conditions began to undermine the approach. In 2008, the Vanguard Treasury Money Market Fund yield fell from 4+% to 0+%. From adequate income to nothing.

Obviously, it wasn’t just that money market fund that fell out of bed. When Fed Chair Ben Bernanke put money on sale at 0%, he turned off the income tap for millions of savers and countless organizations that depended on safe income. Here were the Vanguard Treasury Money Market Fund’s yields that mirrored Bernanke’s Federal Funds rate change…

Year – Yield – Income from $100K

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

The graph below shows the action as Bernanke’s Federal Funds rate dropped from 5-1/4% in fall 2007 to 2% a year later. Then, down to 0% by winter 2008.

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

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

However, by October 2009, Bernanke’s mantra (yes, things are better, but they are not good enough) began. Barron’s tried to shake the tree with “C’mon, Ben. Give Them A Break,” but to no avail. Clearly, the return of an appropriate safe interest rate was not coming anytime soon.

Therefore, my sister and I decided it was time to break with tradition to stop the capital drain. As a result, I began building a portfolio of stocks and stock funds. Slowly, the capital level stabilized and then began to grow, supporting our mother’s needs until her death in 2015. (Without having made the shift, her assets would have been significantly drained over the six-year period.)

The bottom line: Two lessons

First, long-term investing strategies rarely hold up over time. Stuff happens and, like it or not, changes need to be made.

Second, the Federal Reserve is not prescient. Even now it continues to carry out Bernanke’s flawed 14-year experiment of overriding the capital market’s role of setting interest rates. (Left alone, the 3-month U.S. Treasury-Bill rate would be about 5% – not today’s “new high” but meager 2.6% level.

When this experiment finally ends and the capital market is again fully responsible for setting interest rates, the misshapen history we have lived through will be compartmentalized, analyzed, evaluated and rightly criticized.

The worst fallout from what happened is the inequality and damage done to all of those who depended on safe interest income. The overall amount of assets affected has been multiple $trillions. Most of the people and organizations affected were incapable or unable to do as my sister and I were able to do – shift to riskier assets without getting caught by the underlying risk.