As a CPA myself, I often wonder if your occupation and career should be considered when setting an investing strategy.
While many people expect CPAs to be financial experts, we all too many times make the same mistakes as those less financially savvy. Whether our nature causes us to be too conservative with our investments or our interest in money does not translate in our personal lives and investing discipline, we often underestimate our ability to read an interpret financial data outside of our core expertise.
Often, certain careers entice individuals with specific personalities or character traits. For instance, those that excel in sales roles tend to be outgoing and more prone to take risk. Those who work in banking or finance on Wall Street may come across as competitive or aggressive. The primary traits that help us succeed in our careers often come naturally to us and is what draws us to our job in the first place.
However, the traits and characteristics that make a good accountant may not necessarily correlate to making a good investor. After all, accounting leans conservative on the scale in business which may not emphasize maximizing returns in the market through risk.
However, accountants do implement risk-based measures in their work. These principles also correspond to how many investors assess risk versus returns.
If we can simply learn to emphasize our positive factors in our career and mitigate the negative attributes that may hold us back from being good investors, accountants have the potential to greatly succeed as investors.
1. Accountants are Naturally Skeptical
Whether our skepticism comes taught in school or our Type A and detail-oriented personalities cause us to question and examine everything for ourselves, applying a level of “show me” in investing may set us apart as investors.
A healthy amount of skepticism often helps accountants “sniff out” any impropriety in our daily work and ensure the financial numbers make sense given historic trends and projections. Objectivity provides us an unbiased basis to make decisions in our daily work. This can often apply to our own personal finances.
However, skepticism stems from our overall assessment of risk. By implementing skepticism and increased scrutiny, we often create inefficiencies and may even slow down the decision-making process. While causing a slow down may help catch any major, one-off issues, the majority of the time delays cost time and money for our organizations.
Similarly, over-scrutinizing your own investment decisions may cause delays in putting your money to work and lead to “market timing.” Therefore, our skepticism often comes as a two-edged sword.
How Skepticism Benefits Investors:
An accountant’s ability to quantitatively and qualitatively assess financial data with a skeptical mindset may help us avoid pitfalls many other investors face.
Many of the most notorious Ponzi schemes and frauds were perpetrated by well-known figures in finance with the hard-earned money of unwitting investors. All too often, individual investors are too quick to part with their dollars without properly vetting or understanding where their money goes.
Not only does skepticism help us avoid potential fraudsters, we can also avoid a crowded trade. Often, the stock market acts as a popularity contest in the short run. Whether investors flock to a dynamic CEO or founder or a certain product cannot be kept on the shelves, some investors fall victim to trend investing. When sentiment changes, the last investors in a trade often ride the investment all the way down.
As accountants are known for their conservatism, our skeptical mindset helps us avoid many market fads and market bubbles. Often, businesses that portray themselves and their prospects as too good to be true often end up so. For investors who believe the stories management tells without discounting their prospects and analyzing management’s motives, these gullible investors may fall victim to management’s over-promises.
Skepticism allows investors to analyze management’s assertions with a “grain of salt.”
As accountants gather more evidence and get more comfortable with the company and management, we develop an accumulation of knowledge and past results to back up our investment thesis.
Why Skepticism Can Hurt Investors:
However, too much skepticism in our investment mentality may lead to unnecessary negativity in our investing outlook.
The best investors often perceive the long-term value in stocks and markets through “rose-colored glasses.” Aside from perma-bears who continually degrade the future returns of the market and attempt to profit from declines through short-selling, most of America’s most successful investors advocate for the future prospects of our financial markets.
After all, these leaders need a healthy supply of optimism to take the plunge to just start new businesses or try and raise money. In order to take the risk of starting a new company or garner enough capital to invest on a large scale, most of these entrepreneurs must continually reassure investors that the market opportunity warrants the business and their investment would be worthwhile.
However, if you have too much skepticism, you will never take the plunge to invest or you may have a portfolio way to conservative.
Often, conservatism may be the underlying enemy of performance for individuals in the accounting profession. Our personalities may drive us to tolerate less risk which could result in a portfolio heavily weighted to stable, low-growth companies, funds, or bonds. Even though stable, dividend and interest-paying stocks and bonds have a place in a diversified portfolio depending upon your time horizon, overexposure to these investments could result in a lower overall return.
Emphasize the Positives and Mitigate the Negatives of Skepticism
As you can see, skepticism may not be an inherently bad trait for investors to possess.
However, many accountants must deny their nature to be too skeptical and embrace more risk in their own portfolio. Leverage your increased skepticism in your investment decisions as a first pass when analyzing stocks or funds. If something appears off or does not add up, you may investigate further until the issue is resolved or simply pass on the opportunity. After all, thousands of other opportunities exist in the market.
While a healthy dose of skepticism may be necessary, accountants should ensure their portfolio is risk-weighted based on their personal needs, time horizon, and risk-tolerance. For younger investors that have a 10, 20, or 30+ year investing horizon, taking on more risk for greater return may be worthwhile and compound into hundreds of thousands of dollars more. Alternatively, older investors may sleep better at night knowing a larger portion of their portfolio is secure.
Ultimately, your skeptical mindset needs to help you avoid huge mistakes but should not limit your upside potential by assuming more risk.
2. Accountants Thrive on the Details
As accountants, we typically love understanding the details and nuances prior to making decisions. Instead of immediately jumping in with both feet, we enjoy learning and analyzing the details, pros, and cons helps us ensure we make the best possible decision.
Similarly, we should implement the same mentality in our investment decisions.
After all, accountants tend to be studious, hard-working individuals. However, ignoring and not gathering the details may come across as lazy in our investing life. Instead, the details allow us to understand where our money goes, how it is invested, the fees we pay, and how the risk we assume is expected to correlate into higher returns.
Why the Details Matter:
Because we all have a finite amount of money, savvy investors desire to make the best possible decision to maximize returns.
By examining the details of an investment with a skeptical mindset, we may identify key issues or details that may cause the returns to be lower than other investors’ rosy expectations.
Therefore, we can avoid these investments and put our money to better use elsewhere in ideas we properly vet.
The Details May Make Us Miss the Big Picture
While diving into the details can be worthwhile, we must be sure that we do not miss the bigger picture.
After all, we ultimately invest for specific purposes.
Whether we invest for financial independence and early retirement, college costs for our children, healthcare expenses, or wealth creation, we all have in mind a different purpose.
Our dreams, desires, goals, and purpose typically dictate how we invest.
Whether you choose individual stocks or prefer indexing and mutual funds, determining your big picture “why” is imperative to ensure you keep in mind the picture picture.
As cost conscious individuals, accountants may get caught up in small, negligible details such as finding the lowest expense ratio possible or looking for a particular fund with the highest dividend yield.
Often, our own detail oriented nature may cause us to miss the big picture or pick suboptimal investments due to some obscure reason.
While lower expense mutual funds should be used, we can generate a greater net worth and savings through other methods. After all, we could cut out $100 per year from our budget much easier than simply finding another fund that is .01% cheaper.
Instead of going into granular detail, simply buy a basket of funds that produce growth, income, and stability from reputable companies such as Vanguard and Fidelity. These companies offer plenty of low-cost funds to accomplish your “why” and generate returns to meet your financial goals.
3. Accountants are Naturally Risk-Averse
Let’s face it – by our nature and profession, accountants tend to opt for conservatism.
Whether we implement conservative lifestyle choices, clothing, or even investing styles, modesty and poise tends to represent a defining characteristic for our profession.
While conservatism and risk aversion may be helpful in many aspects, implementing greater risk in your portfolio may actually be a better choice.
Most of the general public and including accountants experience fear of loss. Because we feel the pain of loss twice as much as pleasure from gain, we often lean towards conservatism and preservation.
Under certain circumstances, a conservative investment portfolio may actually be the right approach. For instance, if you are 60 and nearing retirement, you hopefully have accumulated a large nest egg to sustain or enhance your lifestyle in retirement.
Because retirees will be withdrawing a portion of their nest egg, they may not have the time horizon to stay fully invested in more aggressive funds or stocks.
In this case, they may choose to allocate a larger percentage of their portfolio to stable, income producing funds.
However, for investors with a multi-decade time horizon, taking on more risk and volatility helps you accumulate a substantially larger sum. As young investors age, they can always dial back their contributions to aggressive stocks and funds and begin taking a more balanced approach.
Why Accountants Can Assume Greater Risk in Their Portfolio
As accountants, our employment prospects and career trajectory tend to be fairly stable.
Because our specialized skills and abilities are necessary for business analysis, reporting, and tax compliance, CPAs rarely find themselves unemployed. While some careers in sales or finance depend upon the overall economy, meeting sales quotas, or unstable bonus payouts, their incomes may experience more variance. Alternatively, accountants generally do not experience that level of volatility in their income.
While this may cap the upside earnings potential for many CPAs, most accountants can assume a steady, well-paying job over the course of their career. Therefore, much of the worry from loss of a job and income can be mitigated through this career stability and demand for financial services.
As such, accountants have much more of a “green light” to pursue more risk in their portfolio compared to many other professions.
4. Accounting is a Stable Profession
Because accountants tend to be fairly conservative, they often experience a decent amount of stability in their lives.
However, just because our careers may seem fairly vanilla, that does not mean our portfolios have to be boring.
Career Stability: Take Some Risk
Just because accountants may not be able to significantly influence their total compensation like those who rely on commission, we still can use our career stability to assume risk and upside in other ways.
While investing involves risk of loss and your portfolio should reflect your goals, risk tolerance and time horizon, accountants may theoretically be able to assume more risk in their portfolio compared someone in a volatile industry or not collecting a steady paycheck.
How is More Risk Reflected?
Generally, we all experience some range of financial risk on a daily basis to some extent.
Whether you spend your free time at the casino in hopes of hitting the jackpot or keep a big pile of cash under your mattress at home, certain “risky” financial behaviors tend to manifest themselves and eat away at your savings.
Assuming Risk Through Investing
However, assuming more calculated risk in your investment portfolio generally yields higher returns over the long run.
Generally, risk can be viewed on a fairly wide spectrum in the investment world. For example, you could have a portfolio of cash in a money market fund yielding 1-2%, U.S. Treasury Bills yielding 2-3%, state and municipal bonds yielding slightly more, corporate bonds yielding an interest rate that varies by rating, stable and mature dividend-paying companies or funds, and more growth-oriented companies’ stock or funds.
While you could choose to put your money away in guaranteed, risk-free Treasury bonds or cash, you will be lucky to keep up with inflation or the overall increase in the cost of goods you buy.
A portfolio of T-bills will not build wealth. Instead, investors generally use bonds as a tool for wealth preservation or for money they can’t leave susceptible to the stock market for 5+ years.
Therefore, a portfolio properly diversified depending upon your age and time horizon could offer a combination of stability and growth.
Cash Management
By its very nature, investing requires a certain amount of cash today to be put aside with the hope of a larger sum down the road.
Not only does investing require an initial pile of cash, but having enough cash on the sidelines can help you take advantage of opportunities in the market.
The Emergency Fund
Aside from our checking and savings accounts, we all need an emergency fund in the event of a major financial shock such as a job loss, illness, or major repair.
The general recommendation most financial planners advise ranges from 3-6 months of living expenses. Depending upon you lifestyle, this could range from a a few thousand dollars to tens of thousands of dollars if you have pretty high fixed monthly expenses.
For those who rely on contingent year-end bonuses, sales commissions, or have unstable occupations, having an emergency fund of 6 months of expenses or more sitting in cash probably becomes necessary due to the instability of your cash flow. This large rainy day fund may be optimal and help these individuals sleep well at night. An emergency fund also keeps you from wealth-destroying behaviors such as tapping high-interest credit cards when the inevitable unforeseen expense occurs.
Consider Decreasing Your Emergency Fund
Alternatively, CPAs who typically experience more stability could opt for the lower range of cash reserves and invest the rest of their cash in higher-growth investments.
As an example, if your family’s fixed monthly expenses amounts to $5,000, you would generally need $15,000 to $30,000 sitting in cash to fully fund your emergency fund.
For those that understand the time value of money and compounding returns, leaving $30,000 in a savings account or money market fund earning nominal interest year after year probably makes you a little queasy. After all, this money could turn into millions of dollars in lost opportunity cost if invested wisely over decades.
Even though emergency funds are designed to be a type of insurance to keep you from diving into your investing accounts or assuming debt when negative events strike, holding too much cash could be sub-optimal and hinder to your overall returns.
With stable and ample job prospects, most CPAs could easily opt to hold 3 months of cash in reserves and invest the rest. As long as you sleep well at night with 3 months worth of cash, lowering your emergency fund allows a greater percentage of your money to work for you and build wealth.
Accountants Can Invest More Aggressively
Even though our nature makes us want to hoard cash and take less risk, our portfolio should generally reflect slightly more risk depending upon our individual time horizons.
As accountants, we’re blessed to have no shortage of work. Often, our work comes in such high demand that we spend 60+ hours per week at the office several months during the year. Let’s face it, if worse comes worst, you almost certainly could find employment or even better opportunities with better pay and hours (especially if you’re still in public accounting).
While you still need certain cash reserves socked away in an emergency fund as insurance, with the bulk of your investments, you probably can invest a little more aggressively compared to your non-CPA counterparts that in your age range.
What Does More Aggressive Investing Look Like?
Whether you enjoy picking individual stocks or prefer mutual funds and index funds, you can ramp up the risk and juice your returns responsibly.
Risk versus Speculation
Often, novice investors correlate risk in investing with irresponsible behavior or untested assets such as Bitcoin or the latest market fad. However, you should first understand the difference in risk and speculation. When you carefully weigh the prospects of an investment based on a sound thesis and determine the likelihood of earning a return is higher, you may be comfortable with the risk.
Speculation, by contrast, has little investment basis in fact. Instead, investors tend to go with a gut feeling often rooted in greed or hope. Remember, “hope” is never a reason to invest or even hold a losing investment. For each and every investment decision you make, you should be able to outline WHY you believe this fund or stock will outperform the market or a S&P 500 index fund. Perhaps, your rationale can be backed by historic trends such as continual revenue growth that outpaces the market average, coupled with promising prospects.
Strive for Outperformance
With each investment you make, your goal should be market outperformance. Otherwise, why assume greater risk and the potential for losing out on greater returns?
After all, risk is all relative. The S&P 500 represents “the market” as the 500 or so largest domestic companies make up the benchmark. The “market risk” is denoted by the Greek symbol beta of 1. Anything greater than 1 indicates the opportunity is a higher risk, more volatile investment compared to the market. To assume this additional risk, investors would require a greater return.
Alternatively, a beta less than 1 results in less volatility in the investment. However, investors expect greater price stability but less overall returns compared to the S&P 500.
Depending upon your personal time frame and needs, you can balance your portfolio to be weighted to either end of the spectrum.
For Younger Accountants, Look for Higher Growth Stocks and Funds
Younger CPAs have a double advantage: job stability and a long time horizon.
Generally, younger investors have a longer time period to leave their money invested and compounding. Younger CPAs also have a promising career trajectory and generally can expect fairly lucrative and consistent pay raises. Therefore, they can continually increase their investment contributions.
While the S&P 500 has historically generated around 10% returns per year, certain other funds and indices have fared even better. Typically, investors may find certain segments of the market such as technology or healthcare even more lucrative. Even if you do not choose to buy individual stocks, you can purchase growth-oriented funds with a track record of beating the S&P 500. While you may experience sharper sell-offs on down days and more spikes when the market does well, generally, these funds can outperform the S&P 500 anywhere from 2-5%.
For Older CPAs Nearing Retirement, Balance Your Portfolio
Hopefully, by the time older CPAs near retirement they have properly planned for their exit from the workforce.
After all, most CPAs tend to be planners, understand compound interest, and usually exhibit frugal lifestyles. Often, these traits allow older accountants to acquire a substantial nest egg over the decades.
As you near retirement, older CPAs must consider their total nest egg, expected returns from lower growth, more stable income-generating funds, and the impact inflation has on their portfolio. Like every other retiree, one of the biggest fears you may have will be running out of money. However, you should also balance this propensity to worry too much with enjoying your Golden Years.
Consider Working Part-Time, On Your Terms
If you are worried you will not have enough in your portfolio to sustain quality of life into your 90s, you could consider using your skills and working part time early in your retirement.
Even if you earned a fraction of your annual income, this earned income could either allow you to put away more in investments or defer withdrawing from your accounts. Deferring your time table for withdrawing contributions could allow you to invest moderately more aggressively rather than holding too much cash or short-term bonds.
Alternatively, you may find that you have the ability to earn the most money you have ever made in your encore career. Either you could start your own consulting, accounting, or tax business or pursue money-making endeavors surrounding your passion. Often, if you do not feel like you must work, you will find that you actually enjoy the responsibility and contributions to society.
Accountants: Emphasize the Good and Minimize the Negatives
Accountants have the opportunity to be incredible investors.
With their willingness to work hard, understand the numbers, and commit to short-term pain for long-term gain, accountants understand the time value of money. Often, our conservative nature allows us to spot pitfalls and avoid the many scams that entrap other gung-ho investors. Additionally, we understand the language of business and can analyze the financial statements and reports better than the general public. These skills give us a leg up on many market participants.
However, our very nature may be our biggest weakness. While the accounting profession draws many of us to it because of the rules and principles-based approaches, many of the greatest investing stories break the rules which allows for their outperformance. While our skepticism may keep us out of trouble, too much skepticism could keep the bat on our shoulder and cause us to strike out on what could be a home run investment.
Therefore, our primary concern should be to embrace a moderate amount of risk and be willing to strike out every now and then. After all, with hard work and study, if we buy a diversified portfolio of great companies that we have analyzed, we have the potential to outperform the overall benchmark.