Paul Winkler: And welcome. This is “The Investor Coaching Show,” and I am Paul Winkler.
Yep, talking about money, investing, financial planning, retirement planning, and doing my best to educate.
Because the educated investor isn’t taken advantage of easily, as I like to say, because if you kind of get this stuff, it’s not so bad.
And you know what? You can get this stuff. That’s the whole premise of this show.
I had a meeting with somebody this week, a couple. And I thought I would just share with you a couple things that came up.
And I thought, you know what? This is probably something that a lot of people have that goes through their mind.
They were referred by somebody. Hadn’t ever heard the show.
And that’s kind of fun for me because you get somebody that doesn’t know a whole lot, and you kind of start from the ground up. And they go, “Man, you really like this stuff.”
And yeah, I do like this stuff. I like the whole idea of educating people on investing in retirement planning, because it can be really, really overwhelming.
Conflicting Retirement Advice
You get to the retirement, and all of a sudden you see 18 million commercials on all the different things you ought to do with Medicare.
That was one of the topics of conversation.
What do you do with Medicare?
You got the Advantage Plan, and they tell you, “No, you need to do this.” And then you got Medicare supplements, and you got everybody who’s telling you to come to their workshop and learn about that.
There are a lot of things. It can be overwhelming.
Different … do Part A. You got Part B.
Do you go with a Part C? Do you have to have a Part D? Do you have prescriptions?
And then you got, okay, now we got to get over to investments, and we got a 401(k).
I got a 401(k) at work, and everybody’s telling me that the 401(k), “Just leave your money at the 401(k) at work, and that’s cheaper that way.” And I talk about that a lot as well.
And then somebody says, “No, this is what you need to do. You need to do this annuity. You need to do this real estate investment trust.”
“You need to do this fund over here. This particular fund family, really, really inexpensive, and you can just go and put all your money with them.”
And of course, it’s really, really inexpensive because they put money—if you look at the really, really inexpensive funds, let me just tell you something.
Should You Go With an Inexpensive Fund?
If you look at the absolute cheapest funds—I was doing this with a 529, and I went and did a search. Because somebody says, “Yeah, Paul, what do you think of 529?”
And I said, “Well, there are a couple of them I like, and here’s why I like them.” And they weren’t amongst the cheapest ones.
Now, we don’t get paid for selling 529s. We don’t do that.
We have the state manage that simply because that’s a very specific tax benefit in that. So I will recommend somebody.
And I saw an article this week about that, as a matter of fact. Talking about how certain state plans are better than others because some are advisor-sold and the rest of them are actually direct.
And I said, “Well, there is something to be said for that because a lot of the advisor plans, the states that are advisor-sold plans make some of the same mistakes that the other states make, but they’re more expensive. They’re just making the same mistakes with higher expenses.”
And so there can be something to be said for that. But the reality of it is some of the states that I would like to use, that I like to recommend to our clients, are higher cost than the ones where I went out on the internet and I said, “What is the least expensive 529 out there?”
How Do Low-Cost Funds Perform?
That’s what I did, so low cost, and I went and looked at them ranked by that. The very number one low-cost one that I found, which was Nevada, was managed by Vanguard.
And what I did is I went to their one where they allocate it for you, and they take care of it for you for a specific child’s age. So I went, and I said, “Okay, so where are they investing in?”
Guess what? Total stock market index fund, total international stock market index fund, and then the total bottom market fund.
And I said, “Well, let’s show what expense can do for you.” And I went back in history.
And I got on the phone with Morningstar. They have the software that I use to look at what areas of the market are being held and how they’re being held.
And I don’t use them for rating services or anything like that. But I use them for data because they’re great for that.
And the rate of return was—I did 2000 through 2010—1%. So whoopee, you got to 1% return over the whole period of time.
I mean, it was low cost. And the point I like to make is you can go back in periods in history and look at the lowest-cost area of the market to manage, and you can find 20-year periods with low costs but no returns whatsoever after inflation.
And it’s just because if you’re only looking for the lowest cost, you’re going to be overwhelmingly invested in areas of the market that are cheap to manage but could go for very, very long periods of time with no returns.
Why? Because they typically are investing in, well, they are investing in the companies that are best known.
The Hidden Costs of the Biggest Companies
Now, when you’re putting together a portfolio that is all of the companies that are best known, it’s very inexpensive to manage because you don’t have a lot of trading costs.
You don’t have a lot of turnover. You don’t have a lot of change going on in the portfolio.
And because you don’t have a lot of change going on in the portfolio, you don’t have a lot of expenses to manage the portfolio, and you don’t have any research, which—research is a waste of time.
So I would agree that that’s not a good thing. Why? And I’ll get into that in a second.
But in essence, what happens, you can get very, very low cost because it’s an area that is so commonly traded and there’s so much volume in those markets. But they’re the very biggest companies.
And here’s the thing: investors will pay top dollar for the very biggest companies. I will pay way more for these companies for every dollar.
I have to pay more. It’s not that I want to pay more, it’s that I have to pay more.
And the reason I have to pay more is because everybody wants them. They’re good, well-known, well-liked companies, and I will pay more for every dollar of earnings that I get.
And this is the key. When you’re investing, you are getting the rights to not only the assets of the company, you’re an owner of the assets of the company, but you’re also an owner of the earnings.
And when I look at that, I go, “Well, that’s where I get my money.” Because I get the earnings of the company.
That’s where returns really come from is me being an owner of the earnings of the company. And if I have to pay a high dollar for every dollar of earnings, that would translate into—long term—lower expected returns.
And maybe even, because those prices can get really, really high at times because of the amount of demand, people are chasing after these companies going, “Man, I want that company. I want that company.”
Think back to the 1970s, and you had the Nifty Fifty. They were the best-liked, the best-known, and the media fell in love with them.
And same—media fell in love with companies in the late ‘90s, early 2000s. They did the same thing, and investors went a decade with no returns.
And you go a couple decades with no returns, and there’s the problem. Therein lies the problem, is you end up with this portfolio that is really, really inexpensive.
Why We Hear Conflicting Advice
The point is—is that what happens—is with investors, you hear this kind of stuff and you go, “Oh, what do I do? What do I do? I’m hearing conflicting things.”
Now, another way that you’re hearing conflicting things is this: Because media likes to sell. They want to feel that they’re really helping you.
And leading you to the absolute lowest-cost one is—they feel like they’re helping you, and a lot of times, they don’t realize that they’re not really helping investors.
And you had a perfect storm, when Trump was in office, that the areas of the market that were the least expensive to manage and the cheapest were the ones that were actually also performing best too.
Now, since the change in presidency, that is certainly not the case, not by a long shot, but it was back then.
And then that’s … eventually, this’ll die out, I mean, but I’m trying to fix investors before it’s too late and you’ve gone and jumped on the bandwagon.
And then 10 years down the road, you’re sitting there going, “Whoa, what happened to my returns? I had the cheapest thing out there.”
Keeping your expenses low, it’s important to me, obviously, but here’s the thing. It’s not the only criteria, is the point I’m trying to make here. Okay?
So it’s really, really important not to be myopically focused only on one aspect of portfolio management, which is low cost.
Now, the other thing is, is this: everybody seems to have a different opinion. All everybody’s telling me does something different.
And here’s where that comes from. This was something terribly confusing to me as well.
You’re not alone. I was terribly confused by this as well, as a broker.
I was working for a big investment firm, and I was—it’s like every time you go to a broker-dealer conference, and you can imagine this.
So you got, “Hey, we’re all flying to St. Louis.” That was where one of them was.
And “We’re all flying to Indianapolis for this one. We’re all going to San Francisco. We got …”
They have these broker-dealer conferences all over the country. And you work for this broker-dealer, and they have selling agreements with various investment providers.
When I first went to work for a broker-dealer, that’s exactly what happened. I went in there, and they go, “Here.”
And they handed us this, they handed me this several page thing, document, that was all the different investment providers that I could recommend to my clients.
And this is it. This is the selling list, so to speak. And you go, “Okay, great, wonderful. What do you guys recommend?”
Because I didn’t know anything back then. It was 25 years ago.
And it was, “Well, we do …” And they would recommend—you’d have certain fund families that gave the firm kickbacks, extra money.
“Revenue sharing” is what it was called.
And they said, “That’s what you ought to recommend.” I didn’t know any better.
Now, luckily for my clients, I knew that I didn’t know any better. And I was hard-pressed to recommend much of anything.
So I went out and sold health insurance and disability insurance, and things that I knew, because I just knew that I didn’t know investing back then.
So what happens is you go to the broker-dealer conference. And then they have all these tables set up. And you go table to table, to table, to table.
And they go, “We got this investment.” And you go, “Calgon, take me away!”
I don’t even know who to trust, who to believe. Everybody’s telling me something different.
And after a while, I started getting really, really frustrated. And I was at this one conference, and this guy goes, says something, and he said something that just hit me over the head.
And he was talking about variable annuities, which I knew were high cost. I knew variable annuities were very, very expensive.
But he said, “Hey, do you know that the subaccounts, there was a study done on the subaccounts”—these are like mutual funds—”inside of variable annuities, and they actually had higher returns than the funds that they were cloned after?”
So you have ABC fund. You can buy ABC fund over here. And you can buy ABC fund inside the variable annuity over here.
And why is the one in here with a higher expense doing better than the one over here with the lower expense?
And this guy starts explaining it to me, another advisor. He was just, I don’t even remember the guy’s name.
I wish I could remember the guy’s name, because I’d love to send him a thank you note, because he described this to me, and he said, “This is what …” And I said, “Whoa!”
And he says, “You ought to go through some training. There are some academics that do some classes around the country,” and blah, blah, blah.
And I said, “Uh, yeah.” And he said, “Here’s how much it costs.”
And I was like, “I’m broke. All I sell is health insurance, and I don’t make very much money doing it. I can’t afford that.”
And he goes … long story short, I did go through the training. And for years and years chased these people around the country.
Higher Costs Due to Active Management
But here’s basically what I found out. What I figured out was that you have different companies, all these different fund companies and different investment providers, and they’re all trying their best to try to be the top performer at any point in time.
Because if they can outperform everybody else, even for a short period of time, they can use that in their marketing.
And then what happens is they all have different people in their research departments, I told you I’d come back to this, research departments that tell you that, “This is what we see going on.”
“Based on the way the economy’s operating right now, and based on interest rates, based on the government, based on what Fed policy is, based on what’s happening over in China, based on what’s going on with unemployment, based on what’s going on with shipping,” or whatever.
“This is what we think is going to happen.” And these are all very smart people, and they can speak at a level that is very, very high to where the average person out there, the average investor listening would go, “Wow, this makes sense.”
As a matter of fact, somebody was talking to me today. They were telling me a little bit earlier, they say, “Yeah, I heard this commercial for this company. They said they’re a fiduciary. You’re a fiduciary, aren’t you?”
And I go, “Yeah.” And he said they’re advertising that they’re a fiduciary, and they do better if you do better, and blah, blah, blah.
And I said, “Well, actually, if you look at their history of returns, they’re not all that impressive.”
Why? Because of what I’m about to tell you.
Active management. Actively stock picking and market timing.
What happens is you have so much trading that takes place that the expenses get higher.
But you can be a fiduciary and manage a portfolio based on thinking that you can time the market, thinking you can get in at the right time or get out at the right time, or that you can pick the right companies or get out of the wrong companies at the right time.
And you can still call yourself fiduciary and do that because you truly believe you’re doing what’s in somebody’s best interest, number one. And the rule is not necessarily, “Is it academically the best thing?”
It’s—you want to make sure you’re not self-dealing. And there’s certain things that you’ve got to make sure you’re not doing in order to …
You’re not going and recommending one investment over another because one pays you a higher commission or something like that. That’s going to be a different deal.
But here’s basically what happens is, if you have active management, if you are actively stock picking and market timing, you will differ from somebody else in what you think is going to happen next.
Each Investment Provider Has Their Own Opinions
I mean, it’s just natural. Because it’s the idea that there’s a mispricing in the market, that this thing is selling for 50 bucks and, “Shh, we know that this is really based on all our research and based on what’s going on in the Fed and based on what’s going on with China, based on what’s going on,” blah, blah, blah, blah, blah.
“We think it’s going to go to $70, and we’re going to buy it, and then when it goes to $70, you’re going to make money.”
And then you have somebody else who says, “Are you kidding me? No, no, that’s not going to do that. That’s selling at $50, and it’s probably going to go down to $40. I think you ought to short it. I mean, it’s not really a great investment at all.”
“And what’s really, what you ought to do is you ought to buy this real estate investment over here, because real estate has all this history.”
“Oh no, no, no, no, no. You need to buy gold.”
“Oh no, no, no, no, no. Not that fund family. That fun family right there, they’re not so great. This fund family over here, and because they operate, they’re using some hedging strategies, currency hedging strategies, and if you’d owned Japanese stocks over the past 15 years and you used a hedging strategy, it would’ve been better for you.”
And then somebody else says, “Oh no, no, no, no. Annuities. You need safety. Forget the stock market. You’re too old for the stock market, and we get a commission if you buy the annuity.”
“Oh no, no, no, no. What you need to be buying is municipal bonds right now. They’re tax free. Municipal bonds, that’s a great investment for your future.”
“Oh no, no, no, no, no. Dividend-paying stocks. That’s where it’s at. You need to own companies that pay dividends, and what you do is you just live off the dividends. And then that way, when the stock price fluctuates and they pay a dividend, you just live off that and you don’t worry about the stock market fluctuations.”
“Oh no, no, no, no, no, no. You need to buy high-yield bonds, right?”
And you go, “What? Wait a minute. I don’t know what to do.”
Well, guess what? All of those things, you think about it, are different asset classes. If I look at, let’s say, annuities, they’re going to be investing in bonds.
Now, the problem is, if you own annuities, there’s a problem managing a portfolio because the expenses are just exceedingly high, and you can’t manage a portfolio properly beyond the scope of this segment.
But then you can say, “Well, okay, maybe I should hold dividend-paying companies.” We’ll call them value companies.
“Oh, maybe I should hold some, let’s say, small-cap stocks, or maybe I should own some large U.S. stocks, or maybe I should have some money in those companies that are over in Germany, or maybe I need to have some Japanese companies—I wouldn’t hedge against the currency, but maybe I do need to own some of those Japanese companies. Maybe I do need to own Australian companies.”
We Can’t Guarantee What the Market Will Do
And what happens is that if you look at asset management as, “You know what? Yeah, I don’t know which one of those is going to do best,” then you’re starting to get a bead on really what, as an investor, you want to do.
You want to make sure you have these various areas.
Now, you keep the cost down. If I’m owning bonds, and I want to get a fixed-income investment, going and buying an annuity and having the insurance company in between myself and my bond portfolio may not be necessarily the best idea in the world.
Going and investing in just dividend-paying companies and pulling off the dividends may not be the best idea in the world because what am I doing? I’m buying companies that are more distressed, typically, and I’m creating more risk for myself.
And what if all of a sudden, those companies don’t do so well and they drop in value, and the companies can’t pay dividends anymore?
What if real estate all of a sudden goes vacant for a while? And then all of a sudden, I bought this real estate investment trust for income, and it’s going vacant, and there’s no income coming in?
And you see that a lot of times. Real estate investment trusts, they go, “And we’ll pay you a 7% yield every year,” and then it drops.
You buy it, and it drops to 2%. And that happens.
I can’t tell you how many times I’ve seen people do that, and then they go, “I got to get out of this thing. It’s only paying 2%.”
Guess what? You can’t get out of it.
Nobody wants to buy it from you because it’s only paying 2%. Who wants that from you?
Oh, shoot. Yeah, that’s probably not a good idea.
The Advice Comes From a Industry Trying to Sell Something
So you do get this confusion when it comes down to it. Mainly because most of the investment information out there, most of the information you get about investing, comes from an industry that is trying to sell you something.
And it is easiest to sell you something that had good past performance.
And it is only—really, the best way to get better past performance than anybody else is gamble with your portfolio or gamble with a portfolio, get lucky, outperform your peers, then advertise that and get somebody to jump to your side. Get somebody to jump into whatever investment that you are trying to sell them.
Because the perception of the investor is that past performance is a guarantee or an indication of future performance, when all of the disclosures that you see on prospectuses and on the disclosure forms that are put out there say, “No, it’s not.”
But because it seems to make sense, because everything else works on past performance—if I want to hire somebody, I look at what they did in their previous job—because it seems to make sense, then what happens is it is an easy sale.
So that is why everything is so confusing, because most of the information you’re getting about investing comes from people trying to sell you something. That is why I believe education is step one when it comes to the investing process.
As I started with, I said, the more educated you are, the more difficult it is to mislead you as an investor. That’s the key, in my humble opinion.
I am Paul Winkler. This is “The Investor Coaching Show.”
Want to talk with us directly?
Schedule a call here.
Ready to meet with us virtually or in person? Schedule a meeting here.
*Advisory services offered through Paul Winkler, Inc. (‘PWI’), an investment advisor registered with the State of Tennessee. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase of sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.