What to Do When Stocks are Pricey

Insightful blog post by Carl Richards titled “You’re No Coward If You’re Keeping Some Money Out of Stocks”.

What should “some” be as a percentage? Conventional investment wisdom is subtract your age from 110 or 100 and invest that much in stocks.

Better yet, think about risk like Richards:

“You see, I hate losing money in investments that are outside my control. It ties me up in knots and distracts me from just about everything. So awhile ago, when I moved some money out of a 401(k) plan into my retirement account after a job change, I left it in cash.

I told myself that I was fine with missing out if the market continued to go up. But I wasn’t fine with investing this pile of cash just in time to get my head taken off in a big, scary market drop. And guess what? That was and still is true. So, I’m fine sitting in cash earning 0.16 percent or whatever the rate might be. I just don’t want to lose.

This decision has cost me in paper gains that I might have achieved, given how well the stock market has done since that decision, but I don’t care. I don’t see it as a real cost. Instead, I see it as an investment in my sanity and my human capital.

The fact that I didn’t have to worry about losing money in that area of my life allowed me to feel comfortable taking risks in other areas. I’ve started two or three new businesses and moved my family to New Zealand. The risks I have taken have provided, and will continue to provide, a much higher return than what I might have received if I remained fully invested in the markets.”

Advice for New Investors

Or old. My previous reference and link to Amazon’s historic stock run up was a disservice to all of the esteemed readers of the humble blog. Same with my occasional references to Apple. Please strike all my references to individual stocks from the record.

Jeff Sommer restores order with “How Stocks Can Make You Rich. But They Probably Won’t“.

Heart of the matter:

How can those two sets of facts — the underperformance of the typical stock and the outperformance of the overall stock market — both be correct?

It is because a relative handful of stocks tend to outperform all others by tremendous amounts.

The conclusion:

“. . . most people picking stocks are unlikely to do well for very long.”

In related news, during the evening commute I enjoy listening to Seattle radio’s “Ron and Don”. They care about their community, they’re funny, and they have a beautiful rapport. However, their good work is seriously undermined by their pimping of an on-line trading school. They’re smart enough to know that 99% of day traders get their asses handed to them, despite that, they promote the shit out it.

I wrote them and asked why. No reply. Yet.

The Credential Conundrum—Limiting Whose Qualified for Which Jobs

Recently I wrote that I’m lucky that my work as a college prof affords me ample opportunities to learn about myself and become a better person. That doesn’t stop me from daydreaming about other work.

Depending upon the day, I’d like to be Dustin Johnson’s caddy, write a newspaper column, be a subsistence farmer, have a radio talk show. The alternative work that loops the most in my peabrain is money counselor by which I mean a hybrid of a financial planner and a financial therapist. I enjoy managing money a lot and I’m always intrigued by people’s disparate thinking about money’s relative importance and how those differences complicate partnerships. Most of all, I’d enjoy helping people reduce the gaps between what they think about money and how they live their lives.

I didn’t know shit about investing thirty years ago when my parents gifted me some money to save on their federal taxes. Somehow, as a modestly paid school teacher, I knew the gift was an exceedingly rare opportunity to build a little bit of a financial cushion, that is, if I didn’t blow it. So I started reading John Bogle’s books, the first step in my personal finance self education. Today, I’m a good money manager for at least two reasons—my independent studies and I internalized some of my dad’s self discipline.

What I’d like to do for an alternative living is listen to individuals or couples talk about their dreams, their finances, their greatest challenges and then help them clarify their priorities, adjust their spending, restructure their portfolios, and enjoy more open and honest communication about money. There’s gotta be people interested in that doesn’t there?

There’s only one problem, to do that work I’d need a long list of personal finance and counseling licenses and certificates. Absent an alphabet soup of credentials, my self education and life experience don’t count in the formal economy.

Licenses and certificates are required in many sectors of the economy. They are designed to help consumers know they can trust that the holders of the licenses and certificates are competent. Take my work with teachers-to-be. Often people bemoan the fact that a Ph.D. can’t teach elementary, middle, or high school without first completing a formal teacher education program that typically lasts 1-2 years, not to mention passing related requirements including content area exams and a student-teaching based performance assessment.

Similarly, if you want to work on people’s nails or hair, you can’t simply rent a space and hang out a shingle, beauty schools offer formal training that culminates in licenses that enable you to “join the club”. Sometimes, when work is complex and requires specialized expertise, the Credential Industrial Complex contributes to public trust. Other times though, when the related work isn’t terribly complex, like working on nails or driving a cab, they can be used to limit competition.

Money counseling is on the “complex, requiring specialized expertise” end of the continuum, but wouldn’t it be nice if our job gatekeepers, the credentialing officials, devised intelligent ways to give some credit to individuals for self study and life experience. Absent that, everyone has to start from scratch, meaning people on the back nine of life, like myself, are less likely to switch things up.

 

The Ultimate Personal Finance Challenge

There are two types of investors, active and passive. Active investors are always educating themselves about personal finance; and paradoxically, tend to use passive funds, due to their lower fees and superior performance. In addition, they are purposeful in choosing a particular asset allocation and they monitor their progress regularly. They invest time and energy into increasing their wealth. I’m an active investor.

Passive investors, because they often think they’re not smart enough, often delegate to financial planners upon whom they depend for choosing particular investments and determining an asset allocation. Passive investors tend to end up with active funds with higher fees because they’re not paying very close attention.* They may not open their quarterly statements. Picture them falling asleep at the wheel of a semi-autonomous, financial planner driven car.

The most important thing I’ve learned in thirty years of investing is that there’s an undeniable point of diminishing returns when it comes to business smarts and investing success. Simply put, some of the most well-educated and successful business people I have ever known have made some of the worst investment decisions I have ever seen. And to add insult to injury, they’ve been unable to admit the error of their ways and reverse course. Too smart for their own good.

Personal finance research shows that once active investors master earning more than they spend, wire the difference into specific exchange traded funds monthly, and decide how best to balance bonds and stocks, additional trading detracts from their returns. Think of trading based on possible changes in the market as a “too smart for one’s own good” tax. Here’s one example.

Once you master earning more than you spend, wire the difference into specific exchange traded funds monthly, and decide how best to balance bonds and stocks, your ultimate personal finance challenge is doing nothing. Hence, consider my triumvirate of personal finance resolutions for 2017: 1) I will not be too smart for my own good. 2) I will not try to guess the market’s direction. 3) I will not trade. Or for the sake of additional research, you could guess and trade away and then we can compare returns in 11+ months.

* I hired an advisor in the early 1990s. Learned an expensive, but ultimately, invaluable lesson, no one cares nearly as much about your financial well-being as you do.

Sentence That Restores My Faith In “The Public”

From today’s Wall Street Journal.

Investors pulled $12.7 billion from actively managed U.S. stock funds in 2014 through November, and put $244 billion into passive index funds from Vanguard and others, according to Morningstar.

Related factoid:

Vanguard is undercutting many rivals on fees. Investors pay 18 cents for every hundred dollars they invest with Vanguard, compared with $1.24 for the average actively managed mutual fund, Morningstar said. The company also is beating its passive rivals, which charge an average of 77 cents for every hundred dollars.

MI-CH113A_VANGU_9U_20150104185406