Month: March 2019

How does your retirement plan look?

Link Joshua VanDyke3 Comments

Many of us, especially those who are younger, probably haven’t thought much about our retirement plans. I wouldn’t have put any thought into it either if I wasn’t an investment advisor. But I’ve run into some troubling stats about the relationship between Americans and retirement, so I think it’s worth talking about.

First, by retirement, I mostly mean age, like somewhere in your 60s. I don’t mean quitting all obligations and sitting around by a lake somewhere. Retirement definitely could include that (I’m counting on it!), but most of us probably won’t be content to only sit around. We’ll probably be doing some kind of work when we’re retired. What you definitely don’t want when you’re in your 60s is to be working full time out of necessity at a job you’d rather not be working at (which is unfortunately normal among retirement age Americans). I think about retirement as a time when people have options. I’ll personally want to keep working or doing something productive, but it could be work that doesn’t pay, or pays very little; I’ll be doing it because I want to, not because I have to. And let’s be honest, at some point we just won’t have the strength to keep working full time, so we need a plan to pay the bills.

Here’s a problem, 1 in 3 Americans has nothing saved for retirement. 4 out of 5 Americans have less than one year’s worth of income saved in retirement accounts. That obviously isn’t great. Consumer debt is on the rise. Student loans put young people in a large hole right out of college, the most fruitful investing years. Credit card debt is up. Car loans are accepted as the normal way to buy a car. The average American starts behind finically and borrows their way further down. Partly because of this debt crisis and partly because of our consumer culture, Americans only save about 3% of their income today, barely enough to keep up with inflation let alone fund their futures.

Compounding all of this is our increasing dependence on savings for retirement. Generation Y (Millennials) and Generation Z will to need to lean on investment accounts more than any generation before for a few reasons:

1) Pensions are all but gone. They’re a conduit for too much risk to employers who have shifted to 401(k) offerings. This trend isn’t actually bad, the market will do a better job growing money, and many employees offer generous 401k matching programs. But in order for it to work employees need to be intentional about utilizing 401(k)s, and to understand how the money is invested within the 401(k)s. That’s where we tend to fall short. Employees miss out on $1,336 in employer matches each year. We also let the money we do have in 401(k)s languish in actively trading mutual funds, surrendering large sums to fees and sub-market performance.

2) We don’t know exactly what Social Security will look like in the future, on its current trajectory it will have to be cut by about 23% by 2033. There will likely still be some sort of social security benefits down the road but it’s not something reliable enough to stake retirement on.

So right now, regardless of your age, do you have any idea what your retirement is going to look like? One meeting with an advisor to take a quick look at your situation could save you worlds of financial hurt down the road. Maybe you’re actually in great shape, or maybe there are just a few small things you can change which would have a dramatic impact on your financial future, or maybe you need someone to tell you your lifestyle needs trimming. It’s something you can, and probably should know.

Are you stock picking?

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Stock picking is the art of choosing stocks that you believe will outperform (in which case you’d buy) or underperform (in which case you’d sell) the rest of the market, at least for a period of time. Whether you decide based on some special analytics or just follow your gut, it doesn’t really matter, you buy stocks you think will do well or dump stocks you think won’t. To put it another way, you’re looking for inefficiencies in the stock market. You believe that the stocks you plan to buy are underpriced; if everyone else knew or believed what you do the stock price would already be higher. Or you plan to sell stocks you believe are overpriced; again, if everyone knew or believed what you do, the stock price would already be lower. Naturally, once you’ve made your move, you expect the rest market to catch up and the stock prices to move accordingly.

Stock picking is a normal practice throughout the investing industry, even the prevailing practice. Professionals have been engaging with it since the inception of the stock market, and, with the advances in technology, more non-professionals than ever also have access through convenient investing apps and websites. Stocking picking is everywhere. In fact, most people think stock picking is investing, that they’re one and the same. The above definition of stock picking sounds like investing, doesn’t it? Here are a few reasons why that’s a problem:

1) Stock picking is built on the premise that the market is not efficient, that smart people can find deals and make money buying and selling the right stocks at the right time. The problem is that’s a false premise, the stock market is actually efficient. An efficient market means that stocks are never overpriced or underpriced, there are no deals, there is no right or wrong time to buy. Stock prices move based on future news and information (no one knows the future) and they react to the new news and information very quickly. If you purchase a stock based on an intuition about the future, that’s just guessing. If you purchase a stock because you believe it’s poised for growth based on a new report you read, the stock price has already adjusted to the report’s information, the price has already moved. With improving technology and additional regulation the market is more efficient now than ever before. News is disseminated immediately and trades can be placed instantaneously. There are differing beliefs as to the level or scale to which the market is efficient, but research continually supports the Efficient Market Hypothesis. Since the market is efficient, stock picking doesn’t work by definition.

2) Research into the results of stock picking has been impressively depressing. Study after study shows that no one, not even professionals, has consistent success picking stocks over time. People will outperform the broader market occasionally, maybe even for a few years in a row, but because of the number of people trying that’s a statistical probability, it’s not based on any skill. Professor Russ Wermers stated in a 2008 mutual fund study, False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas, that “the number of funds that have beaten the market over their entire histories is so small that the False Discovery Rate test can’t eliminate the possibility that the few that did were merely false positives.” He’s basically saying that there are so few active stock pickers who have outperformed the market that they were more likely a product of luck than skill. And that’s the professionals. Stock picking doesn’t work because it’s built on a false premise and the research agrees.

3) Research into the costs associated with stock picking is also grim. William Harding, an analyst with Morningstar, said that the average turnover ratio for managed domestic stock funds is 130% (Apr 23, 2018). That’s a terrifying number. It means that through the course of a year the fund will replace all of the stocks it owns, and then re-replace another 30%. It means that the average stock is held for only 281 days. There is a lot of trading going on here. One of the reasons stock picking fails is because of the additional expenses it incurs for all of these trades. Active funds charge an expense ratio, which is normal (although active funds typically charge higher expense ratios than passive funds because of the additional work it takes to actively trade), but they also incur significant trading costs, which is unique to active funds. The expense ratios are published but the trading costs often aren’t. A 2013 study, Shedding Light on ‘Invisible’ Costs: Trading Costs and Mutual Fund Performance, discovered that the average trading costs of mutual funds amounts to 1.44%, that’s in addition to the already higher expense ratio. Even worse, funds owning higher performing long term asset classes (see Three Factor Model) have even higher trading costs, 3.17% on average for small cap funds. These additional trading fees are debilitating to fund returns.

So stock picking is built on a false premise, it doesn’t work by definition, and it charges a premium for its lackluster results. On top of all of that, there’s a massive cost of lost opportunity when your portfolio is stuck stock picking. While your funds are engaged in the losing strategy the rest of the market is consistently earning great returns over time, returns that can be captured simply with diversification, rebalancing, and discipline. Unfortunately, large swaths of the investing industry still promote the active stock picking strategy, in fact, you’ve more than likely got stock picking funds in your 401k portfolio. There’s a better way to invest.

Consumer vs Creator

Link Joshua VanDyke1 Comment

On its surface, distinguishing between consumer and creator might seem to imply that you should stop watching Netflix and start writing a blog, at least that’s what comes to my mind. That’s an incomplete picture, but I do want to think about the difference between consuming and creating, and how we can be better creators.
A consumer is someone who maximizes intakes. Watching too much TV, eating too much food, or buying too many unnecessary things could all be symptoms. At its base, it is excessive, wasteful, and unfulfilling. That’s not to say consuming is all bad. If you don’t consume food you’ll die, we’re made to consume things. But the definition of a consumer here is someone who is addicted to over-consuming, who lives to consume, and that’s generally bad. You could say the point of consuming is to take.
A creator is someone who focuses on outputs. Creating doesn’t necessarily mean writing or drawing or filming, it can be almost anything that’s contributory. When you engineer additional efficiency into a process at work, or cook a meal from a new recipe, or finish your latest house project, that’s also creating. You could say the point of creating is to give.
None of us are only a creator or only a consumer, but people do seem to shade one towards or away from the two. If you find yourself too far over to the consumer side, which is where we tend to fall by default, it can be tough to dig yourself out and start creating. But here are a couple tips to get started:

  1. Think about your purpose. What are you here for? Who do you want to be? What do you want to accomplish? When you give those questions a good mulling over you’ll probably come up with answers that include creating. Write your answers down, set goals around them, keep reviewing them. A connection between purpose and goals, even between purpose and specific activities, is your guide. If a goal or activity doesn’t match up with your over-arching purpose you can cut it out, if it does match up, go after it. Without the clarity purpose brings, you’ll be tossed around and most likely end up settling back into comfortable consuming. The best way to start moving from consuming to creating is to know why you’re doing it.
  2. Read good books. This could technically be considered consuming, but it’s the best type of consuming, even a necessary type of consuming, in order to be able to create. If you’re not learning and growing it’s tough to have anything to share. Think about a preacher, they do lots of creating, to the tune of a 10+ page document (or two) per week. How can they possibly produce that kind of output? They read, a lot. They fill themselves up with ideas and information which they bring back to their congregations. The same is true for this blog, I wouldn’t have anything to write if I wasn’t reading. Reading should include articles and blog posts, but I specifically mention books because they’re the best way to interact with whole ideas and complete thoughts. Instead of only picking up bits and pieces of information, a book can change the way you think.
  3. Separate your consuming and creating tools. I’ve made multiple attempts to switch to an iPad only workflow in the last few years. One of the main problems I’ve run into is a confusion of purpose. My goal was to use the iPad for both creation and consumption, thereby reducing my technology loadout. It was a noble goal, but one which resulted in a lot of consuming and not much creating. For whatever reason, my mind has a hard time creating on a device that I also use for consuming, regardless of its capability or functionality (which is a whole other issue). Instead, when I use my MacBook mainly for creation (work, writing, projects, etc.), and my iPhone mainly for consumption (news, information, games, etc.), I’m much more productive.
  4. Carve out the time. This is where we often get stuck, who has the time to create things? You might have to get creative before you can create. The most important thing you can do here is to block out a chunk of time on your calendar. This time is sacred. During the block, turn off as many notifications as you can. Choose a place that will minimize distractions. I like to be somewhere other than my desk where normal working habits kick in. A coffee shop could be a nice change of pace, plus it provides a little extra motivation to commit to the time block. The point is to decide on a time and a place where you can focus. It takes some work to create a successful time-block, but it’s surprisingly enjoyable and energizing when you do it.
  5. Start small, continue daily. You don’t have to change your life to create something. Just pick one small thing and do it, today. Then do another small thing tomorrow, and then the next day. Your first time block could be 10 minutes deciding what or how you want to create. It can be directly related to your work or it could be the start of a new side hustle, as long as it involves creating. One thing I’ve committed to is writing 250 words per day. Before I set this goal for myself I had already been writing, but mostly in fits and starts, nothing consistent enough to build upon. That one small daily goal has been critical for me to remain consistent. It’s a lot easier to write 250 words per day than to write one blog post per week. Many small achievements performed consistently over time, one day at a time, will beat a big breakout effort one hundred times out of one hundred.

I will be the first to admit that I don’t have this all figured out, I still spend too much time consuming, but these are a few things that I’ve learned and found helpful. Consuming is easy, let’s do something hard.