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

You Don’t Need a Financial Planner, You Need Financial Teachers

The things I don’t know how to do dwarf the things I do. It’s sad really. Altogether, my incompetence is pretty staggering. I can’t speak any foreign languages. I can’t play any instruments or sing. I can’t listen patiently. I’m hopeless when it comes to plumbing, electrical work, bicycle and car repair. I don’t know how to sew and I can’t do my own taxes. I don’t know how to garden, bake bread, make beer, or fix the ice maker in our fridge. I can’t keep pocket gophers from tunneling all over our backyard. I don’t know how to backstroke underwater and html baffles me. I could go on and on, but you get the drift.

Despite this pathetic reality, I went against type recently and taught myself two things, how to create excel documents and how to prepare a Starbucks-like green tea latte. Life is especially good now that I don’t have to spend my weekends adding numbers or pay $4 for my daily kickstarter of choice.

Few people know how to manage money well so they turn to financial planners for help. Gail MarksJarvis ask whether there’s any value in financial advisors who get it wrong.* She points out that:

. . . the recently released 2008 Federal Reserve transcripts showed that even economists of the world’s most powerful economy didn’t have a clue. Even as Lehman Brothers collapsed, they expected the economy to grow, not go into the worst recession since the Great Depression.

That, she adds, should. . .

pierce an illusion many individuals embrace as they pour trillions of dollars into the hands of financial advisers they think can read the future and thereby deliver riches and safety.

Individuals, she says, entrusted about $13 trillion to advisers, ranging from financial planners to brokers and insurance salespeople, through the end of 2012.

Ed Gjertsen II, president of the Financial Planning Association admits, “We do not have a crystal ball. We make guesses.”

Gjersten laments:

Clients demand: Give me a hot tip so I can spend whatever I want. But the truth is, the individuals have more control over the outcome based on what they spend than the adviser has with investments.

MarksJarvis adds:

Even economists are more fallible than people might believe. The transcripts of the Federal Reserve in 2008 showed it relying on faulty models that didn’t take into account unique circumstances of the banking crisis. Based on little knowledge, they give very firm opinions.

In my early 30’s I taught myself how to manage money when it became apparent that the financial planner I hired didn’t really give a damn about my family’s future. Over time, I realized that he recommended investments that paid him generous commissions. Investments that not only took time and money to undue, but ones that performed worse than bond and stock index funds.

There are two types of financial planners—commission based and fee based. Fee based planners who charge by the hour are far better than commission based ones who are prone to recommend investments that enrich them more than their clients. What people really need are skilled financial teachers who can help people learn to manage their money themselves because of the lesson I learned the hard way two decades ago, no one cares about you or your family’s future nearly as much as you. But where are the financial teachers?

13 trillion dollars! Much of that spent on investment strategies that underperform market averages. What a travesty.

If the world’s most incompetent person learned to manage money, odds are you can too. Start with The Elements of Investing by Burton Malkiel. But don’t succumb to the widely held view that technical knowledge is the key to personal financial success. The key is defining “success” yourself and developing a complimentary mix of technical knowledge; self discipline; and dare I say, spiritual depth; to create the future you want for your loved ones and you.

* Thanks to the best ex-mill hunky for this reference.