Investing is like working out

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Everyone knows they should be exercising. Everyone would love to tighten up the softer spots, see some muscle definition, feel strong and energetic, and be more confident in the way they look. Unfortunately few do it.
The formula to accomplish all of these great benefits is not complicated. Everyone knows about a gym nearby they could join or maybe already have joined, everyone knows how to walk or run on a treadmill, everyone understands basic dumbbell movements, everyone has broken a sweat at some point in their lives. We know what exercise is, it’s a pretty simple concept.
So why are so many of us overweight and dissatisfied with our physical selves? Working out is simple, but it’s also hard. It takes work, it takes some pretty intense discipline, and it takes a severe level of consistency.
Investing is similar (although, maybe a little more complicated). Most of us understand the concepts of buy and hold, diversify, and making regular contributions, but it’s tough to do it right and do it consistently. When the market recessed in 2008, net redemptions (the amount of money being pulled out of the market) were astoundingly high. Buy and hold philosophies went out the window when things got scary. When trade wars make the international investing landscape seem less certain, people begin wondering if they should be invested outside the U.S. at all. When people want to buy a house their retirement accounts seem like a good place to pull money for a downpayment. None of these things are evil, but they’re often hampering financial progress, and sometimes lead to devastating effects. It’s simple, but we still mess it up.
What’s the solution to these things that are simple but hard, these things that we know we should be doing but have a difficult time actually doing? The solution is a coach.
We get coaching from all over the place, books we read, people we trust, professionals, etc. In fitness, a coach is someone who gets you to the gym and shows you what you need to do. In investing, a coach helps you understand investing, avoid pitfalls and panics, and achieve outcomes you’re pursuing.
So work with an investing coach, and hit the gym.

Index Issues (part 1)

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Passive index investing has seen significant growth over the last 30 years as an alternative to active (stock picking) investing. Studies surrounding active investing have shown that on the whole, active investors underperform the market significantly, for two main reasons: high fees and poor stock selecting. As people come to grips with the problems inherent to active investing they naturally turn towards index funds, which seems to solve both of the problems listed above. Index funds are typically very cheap to own (solves the fee problem), and instead of actively picking stocks, they simply own sections of the market (solves the poor stock picking problem). Sounds pretty good, right?
Well, it’s definitely better than an active investment strategy but index funds are not without their problems, and they’re certainly not the best way to invest your money. Here are a few issues:

  1. An index is arbitrary. The S&P 500 Index (the most popular index out there) was created more as a measurement than an investment vehicle. It’s simply a list of 500 of the largest companies in the U.S., there’s no magic to the number 500. But that’s the thing, indexes were not created to maximize investor returns or diversify into asset classes in the most strategic way, they’re just arbitrary measurements.
  2. Index funds are almost all cap-weighted. This is an important thing to note. What this means is the larger the company, the larger percent of the index it takes up. In the S&P 500, the largest 10 companies take up 20% or more of the entire index while the bottom 10 companies take up less than 0.2%. In any index, most of your money is going into the most valuable several companies instead of being evenly diversified. A total U.S. market index fund, while seemingly offering lots of diversification, is almost entirely loaded up in the largest companies because of its cap weighting.
  3. Index fund investing often puts your finger on the trigger. Many index fund investors do their investing on their own since you can own an index fund yourself for a fraction of the cost you could pay an advisor to put you in the exact same fund. I’ve made this point in the past, but when it’s as easy as the click of a button to pull money out of an investment account, people tend to make mistakes. The S&P 500 for instance, has averaged about a 10% return per year for almost 100 years, which is fine, not great, but fine. However, from 2000 to 2009, it averaged a -1% return per year. It doesn’t matter how low the fees were or how well it compared to the stock-picking accounts, precious few of us would have stuck around for those returns over 10 years if we could move the money with the click of a button. Successful investing requires good coaching. Good coaching should include a better portfolio than a bunch of cheap mutual funds.

So what’s the alternative? Stay tuned for part 2.

Can investing be stress-free? (Part 3)

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Requirement 3: Coaching. 
Success in investing, just like success in many other things, requires the help of a coach. The stock market is the greatest passive wealth creation tool in existence, but it’s not a cakewalk to navigate. Successful investing requires knowledge of the market and an unwavering dedication to the right investing philosophy. When the market turns downward, which it has and will again, most people freak out and make serious mistakes with their investments. Investor stats from the 2008 crash are astoundingly bad. Billions of dollars fled the market at effectively the worst time to get out (at or near the bottom). It was the second crash the S&P 500 had suffered within the decade and people were understandably scared and pessimistic. This is where a coach helps. A coach will help you gain an understanding of the market (so you won’t have to stress about the downturns), but more importantly will help you maintain your investing discipline (so even when you do feel stressed, you won’t make a big mistake). When most investors are panicking, a coach will keep you on track.

A good coach is the most important facet of stress-free investing. They help by educating clients to an understanding of the market, they help by providing a great portfolio, and they help clients actually obtain the market returns and outcomes they’re looking for. A good coach will allow clients to focus on their purpose instead of stressing about how their money is doing in the market.

Is a recession coming?

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Last week Wednesday (the 14th) was a bad day, at least it was a bad day for the markets. I actually had a pretty nice day, maybe you did too. The market took a hit though, the DOW was down 800 points (about 3%), its worst day of this year, and other indexes didn’t fare much better. The chatter is heating up, the next recession is on the horizon! But is it?
Well, the Wall Street Journal certainly seems to think so. In an article title Stocks losses deepen as a key recession warning surfaces published last week, the WSJ espouses the fearful sentiment pervading the industry last week. A few quotes:

Whether the events presage an economic calamity or just an alarming spasm are unclear. But unlike during the Great Recession, global leaders are not working in unison to confront mounting problems and arrest the slowdown. Instead, they are increasingly at one another’s throats.

This sounds especially bad. At least in 2008 people were trying to fix the problem!

“The stars are aligned across the curve that the economy is headed for a big fall,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “The yield curves are all crying timber that a recession is almost a reality, and investors are tripping over themselves to get out of the way.”

Yikes, sounds like someone is about to get trampled.

The U.S. economy has shown signs of weakening in recent months, but high levels of consumer spending in the United States have helped enormously. Still, the escalating trade war between Trump and Chinese leaders has stopped many businesses from investing. And there are signs that the large tariffs he has placed on many Chinese imports is costing U.S. businesses and consumers billions of dollars.

If this isn’t a rollercoaster of emotion I don’t what is. Signs of weakening? Oh no! High levels of consumer spending? Okay, so not too bad. Tariffs are costing U.S. business and consumer billions? Run from the market!

I kid, but this is actually serious stuff. The WSJ is only one among many news outlets forecasting the next crash. The problem is, no one knows when the next crash will be, regardless of ‘key recession warning’ claims, because the market moves on new news and information, things that no one knows. Unless of course, you know the future.

Just today, exactly one week later, we’ve got a new narrative in the news: Stocks are on a comeback. Dow rises 250 points. The rollercoaster is exhausting.

Instead of tuning into the cycle, remember that great returns don’t come from any ability to time the next crashThe market recesses sometimes, and it could be contracting now, or next year, or in five years. We don’t know when, we just know that’s how the market works. The disciplined investor who has a plan for whenever the next crash comes and a coach to get them through it will always win.

Coach, Financial

You don’t hear the term ‘coach’ tossed around much in the finance world. If you do it usually refers to some sort of business coach, a coach for the professionals. In the normal world, financial professionals are typically called financial planners or financial advisors, not coaches. But here’s why I like to call myself a coach:
A financial planner/advisor is someone who provides some sort of product or service (or both) in return for a fee, which is effectively sales. Some of them are fiduciaries (meaning they’re obligated to put the client’s best interest first), some are simply looking for suitability (whether or not a certain product could be considered suitable for a customer, not what would be best for the customer). Many of them mean well, but they fall short in one key area, they don’t ensure the success of their clients. The job is to provide a product (financial plan, insurance product) or service (investment advice, meetings) which may help (or hinder) investors to varying degrees, but it’s not to provide an outcome.
Dalbar’s (an investor research company) Quantitative Analysis of Investor Behavior study shows that average investors underperform the market year after year. Morningstar’s annual Mind the Gap report shows that investors even underperform the funds that they’re invested in (largely because of active movement and bad timing) year after year. The worst part is that most of these investors are working with planners and advisors. So what gives? One of the biggest components of the problem is that the professionals helping clients are salespeople, not coaches.
There are two opposing ways to define the customer/financial professional relationship: cater or care. Most financial professionals cater to customers. If the customer wants a certain product, the professional is ready to fill out the paperwork. If the customer wants to shift investing strategies, the professional is ready with three other options. What’s best for the customer in these scenarios is effectively irrelevant. Professionals end up filling orders (catering) instead of coaching and educating clients on options that fit best with their goals (caring). Add in the commission trap problem and it’s almost impossible for many financial professionals to truly care for clients. Instead of investing in the success of the client, they’re focused on keeping their business alive.
In contrast to this, a financial coach is interested in one thing: helping people achieve their goals (caring). The relationship is not driven by products or sales but by a partnership working towards an outcome. The whole orientation is different. Where a typical financial professional is looking for ways to fit products onto perceived problems, kind of like trying to plug holes, a coach is looking toward the long term success of a client and working with them, year by year, to achieve that success. Ensuring the success of a client includes many things, including financial products and services, but the key ingredients are educating and coaching. Educating so that clients know how and why they’re invested the way they are. Coaching so that clients are empowered to stay the course. Things get scary, pitfalls abound, it’s probably going to be a long journey, a coach walks alongside to ensure your success.