Financial Advisors aren’t evil (mostly)​

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I met a stranger this morning (the beauty of Facebook marketplace). He had looked me up in advance, not to be creepy (he assured me), just to make sure he wasn’t meeting a crazy person. He saw that I’m a financial advisor and wondered if I had ever met his financial advisor, whom he trusts very much. In fact, he trusts his financial advisor so much he recently handed over full discretion, meaning the advisor no longer needs his permission to make trades and move money. It was becoming cumbersome to give the okay every time the advisor wanted to make a trade. I informed him that I had not met his financial advisor, and he assured me that his advisor is a great guy.
Here’s the thing, I’m sure he is a great guy, I’m sure his intentions are (mostly) pure. Many financial advisors are really great, and they really care. But that little discretionary bit he shared with me is alarming. When it becomes cumbersome to approve every trade your advisor wants to make, that’s a problem. According to the data, financial advisors who actively trade routinely underperform the market, even advisors who are really great guys. Don’t work with an advisor only because he or she is a great person. Find an advisor who is a great person, but who also understands how the market works, how to most efficiently capture returns, how to avoid stock picking and market time and trying to beat the market, and most importantly, how to coach you. Your future depends on more than the integrity of your advisor. He may not be evil, but he may also be submarining your retirement.

5 ways your investing app is ruining your retirement

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In the last five years, we’ve seen the explosion of alternative investment avenues, especially through apps. While technological advances (computers, algorithms, the internet, you get it) certainly make investing a better and easier experience than it’s ever been, they’ve also promoted some troubling trends in popular consumer investing apps.

Here are a few ways your investing app is ruining your retirement:

  1. Investing apps are built for active trading which loses money compared to the market. In order for investing apps to be interesting, they promote active trading. No one wants or needs an app to help them buy and hold and never make trades. Unfortunately, active trading is a recipe for disaster. Even professionals lose to the market when they actively trade stocks, not because of any inherent flaws in themselves, but because it’s literally impossible to consistently beat the market.
  2. No great offerings. Because they’re designed to encourage active investing, investing apps don’t offer many great investing options. Even if you could ignore all the crap, the best funds aren’t in there. Sure, you can find some cheap ETF and index funds, which aren’t the worst options in the world, but they’re definitely not the best. And investing apps know you might try them out, but ultimately you’re going to be moving money around.
  3. Your earliest years are the most important years and you’re wasting them. Investing apps appeal unilaterally to younger people. The great thing about investing when you’re young is that money invested early will compound far more significantly over time than money invested later. Unfortunately, many young people fall prey to these investment apps which do the opposite of maximizing investment dollars.
  4. Mis-education, worthless news. In order to make active investing seem legitimate, investing apps often share news and information regarding the market. Unfortunately, the news is not helpful for investing. Instead of learning about how the market works and how to prudently invest money over time, these excerpts simply validate terrible investing strategies.
  5. Encourage bad behavior. This is the biggest problem. Instead of educating investors, investing apps take advantage of them. Active investing feels right, it seems legitimate, and investing apps only encourage that feeling. Unfortunately, the feelings of investors have no correlation with successful investing, if anything they’re negatively correlated.

So dump the investment app. Learn about important investing concepts like Efficient Market Hypothesis, Modern Portfolio Theory, the Three-Factor Model. Get a good advisor who will get you into the best funds and help you remain disciplined through scary markets. Take your purpose seriously, it’s probably something worth more than speculating and gambling with your investments.

Recession rumblings

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I’ve been hearing a lot of rumblings about the next recession recently. Just last week a podcast host went through great pains to explain why the next recession will hit within the next year. I even agree with some of the foundations of his economic arguments, but there’s always a leap of faith involved when a prediction is made, especially when it comes to an economic recession. Here are a few things to think about the next time you encounter one of these predictions:

  • No one has a good grasp on what the market will do tomorrow, let alone what it will do in the next few weeks or months, or especially years. The reason it’s so hard to predict the market is that there are trillions upon trillions of data-points that all influence how the market will move. These trillions of data-points are also constantly moving, so even if you did have a pretty good grasp of what was happening in the market, five minutes later it will have all changed. It’s simply impossible for us to get a full picture of the happenings in the market.
  • Even if you did have a solid continuous grasp of the trillions upon trillions of data points in the market as they changed, it would still be impossible to predict market movements because the market moves based on data in the future. Even if you understand the current market completely, unless you know the future you’re going to have a tough time predicting where it will go.
  • Let’s pretend for a moment that you can see the future and you know for sure that a recession is coming, that would be awesome. But there’s still a problem, not only would you have to know for sure that a recession is coming, you’d have to know exactly what day it would begin and exactly what day it would end in order to profit from that knowledge. The market moves quickly, if you miss just a few of the best days (which often come right after recessions) it would have been better for you to remain invested and ride out the storm than to pull your money out and wait to get back in. Market timing is a deceptive thing. We intuitively think the best move is to get our money out of the market when a recession is coming, but the opposite is true. Even in the face of a recession, the best move is to remain invested. Unless you can comprehend trillions of data-points and know the future with an incredible level of specificity, don’t buy into the recession rumblings.

Quitter

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We hate quitting. Quitters are losers, quitters are weak, quitters don’t accomplish anything, you get the picture. We’ve even got some nice quotes, like “winners never quit and quitters never win” from Vince Lombardi, and “all quitters are good losers” from Robert Zuppke, and “when my car runs out of gas, I buy a new one. I don’t want to ride around in a quitter” from Stephen Colbert. Quitters may be losers, but those are some winning quotes, eh?

I’ve mostly bought into this quitting stuff over the course of my life, most of us probably have. It sounds awesome to never give up, to always achieve whatever you set out for in the end. It speaks to the unconquerable human spirit, the idea that we can do anything we set our minds to. Well, I’ve changed my mind, with the help of David Epstein and his awesome book Range.

Before I get too far I should make a distinction, there are different types of quitting. I’m not talking here about quitting in the sense that you’ve given up on life, or decided to live out your days in your parent’s basement, or stopped trying. Don’t ever quit only because things are difficult or scary.

What I am endorsing is a relentless search, an unwavering experimentation, a commitment to continually try things. This means quitting, probably a lot, probably in a lot of different pursuits. It means trying and failing quickly. Maybe it’s a project at work, maybe it’s a fruitless side-hustle, maybe it’s a crappy book. Whatever it is, don’t be afraid to pull the plug. Not because you’re giving up, because you’re after something better, trying something new.

Epstein points out that success does not come from early specialization and simple grit (passion and perseverance in one area). Grit is important, and specialization can be too, but perseverance for the sake of perseverance is not helpful. “No one in their right mind would argue that passion and perseverance are unimportant, or that a bad day is a cue to quit. But the idea that a change of interest, or a recalibration of focus, is an imperfection and competitive disadvantage leads to a simple, one-size-fits-all Tiger story: pick and stick, as soon as possible” (Epstein, p 145). Counterintuitively, trying and changing are much more closely tied to success than blunt perseverance. Seth Godin, in his popular little book The Dip, notes that perseverance through difficulty is a real competitive advantage in business, but he also notes that perhaps the best advantage is knowing when to quit. The ability to walk away from something in pursuit of something better, to keep moving instead of persisting in stagnation, is a mark of success.

This all takes some wisdom, we need the ability to distinguish between a simple aversion to difficulty and a smart move towards better options. But here’s the important point stated positively: try things! If it doesn’t work out, or it isn’t what you hoped for, quit! Just don’t ever quit trying.

Create vs React

 

kelly-sikkema-JRVxgAkzIsM-unsplash.jpgThese are two words that you probably wouldn’t naturally juxtapose, but I promise it makes sense.
I’ve talked about actions and habits before, about how important it is to focus on tangible actionable things in order to move forward and affect change. Well, creating vs reacting is another helpful way to think about action, more specifically, what drives action. Here goes.
We’ll start with reacting because for a lot of us it’s more familiar, also it’s the lesser of the two options. A reaction is usually a response to some sort of problem or threat, it’s negatively sourced, something bad has or could happen, and you need to react to prevent it. A common phrase in the knowledge working world is ‘putting out fires,’ meaning problems constantly arise and we’re constantly reacting to solve them. A reaction doesn’t really move things forward, its main goal is to keep the status quo, keep the business functioning, keep the customer happy, etc.
Creating, on the other hand, is much more exciting. Instead of arising out of a problem or threat, creativity is sourced from vision and purpose. Creating is about solving problems before they show up, about creating solutions and possibilities. It’s pro-active action instead of reactive action.
Here’s a quick example: let’s say you’re working for a customer-facing firm who provides financial coaching and investments. Clients have been semi-regularly frustrated by poor communication from the firm, and your job has often devolved into smoothing things over with disgruntled customers. You’re a reactor. But, dissatisfied with this type of work existence, you remember why you’re actually doing all this: to serve people well with the best financial and investment advice in the industry. So if that’s the purpose, reacting to communications problems is incongruous with that purpose. What would serve that purpose? A system of communication and education designed not only to clamp down on the ‘frustrated customer’ problem, but to help customers think differently about money and themselves!
Creating comes from a different place (vision and purpose) than reacting (fear and problems). See, juxtaposition!