Paul Winkler: Welcome to “The Investor Coaching Show,” I’m Paul Winkler talking about money and investing here.
Back to the Basics
So every once in a while, I get into a conversation with somebody and I think, Man, maybe I need to go back to a couple basic things that I’ve talked about.
I tend to be a little bit paranoid on the radio show, quite frankly, because when you’ve done something for 22 years, and you feel like you’ve done everything and talked about everything, sometimes you just overlook the basics or don’t think about it necessarily.
Just imagine you’ve taught something for so long, and then you want to give something new, some new angle.
I want to go back a little bit to something I think is really, really important.
I was talking to somebody and having a conversation about spending and budgeting, those types of things. We were talking a little bit about the process of budgeting, and the example I like to give with budgeting is from The Richest Man in Babylon, where you have all these different people. I’m going to give you the really short version.
You have all these different people in the audience, and the richest man in Babylon is giving them a tutorial. He asks them what they do for a living, and they all do different things for a living. He asks them if they all end up making the same amount of money, if they have the same incomes. Of course none of them have the same income; they all have different incomes, and then what he says is, “Well, how is it that all of you having different incomes end up with the same amount of money left over? Nothing, because you haven’t saved anything.”
They’re like, “Wow, we never thought about it that way.”
To me, that was a profound idea when I was 25 years old, reading that and going, “Whoa, yeah, that’s really interesting. How do they all have different positions where they have different incomes, but end up in the same position when it comes to savings?”
Hence, that was a big eye-opener for me.
What happens so often is like, “Well, I can’t possibly save because we got this, and we got this, and we got this.” You really think about it, you ended up in a position where you are maybe spending more.
I mean, maybe you’re spending more than what you’re actually making and going into debt, which is even worse.
But it’s typically that we spend everything that comes in, unless we protest to the contrary.
So that, to me, was a really profound thing.
This mentor of mine would say,
“Save first, and then spend what’s left over.”
He said, if you just reverse it, “Don’t spend, and then save what’s left over because there’s nothing ever left over.”
He said, “You can get yourself in a position where you start to have some financial freedom and have some breathing room because there’s always going to be an emergency.” So you save into emergency type of investments, like money markets or savings accounts, or something like that that doesn’t fluctuate in value.
Then once you have started to build that up to three to six months worth of spending — whatever you’re spending is in a year, save three to six months of that — then what you do is you start saving into other things.
There was somebody who was telling me about a budgeting tool. There are lots of them out there, but it was an app: You Need A Budget, if I remember correctly, ynab.com.
This woman says, “The best thing I ever did.” She said she spent a little bit of money on it because they charged for it, but it was this great tool, and it helped her. It was something that she would go with and would work with. So You Need a Budget, or any budgeting tool, anything that you’ll make it a priority to every once in a while sit down and look at the spending that you’ve got going on and have a system.
Think Ahead With Discipline
I remember very distinctly that you didn’t bother dad on the Saturday when he was going to be sitting at the kitchen table with all his bills laid out all over the place, and he was going to be going through everything. He ended up having great discipline, and ended up doing well.
He was working for the government, so he had a pension. He didn’t really need to save a whole lot of money because his retirement was going to be taken care of by the government pension since he’s military. But the thing is, still in all he did, he had the extra savings, and that allowed my parents freedom later on.
We never think about what it’s going to look like later on, but later on comes a lot faster than you think it’s going to come, and then what happens?
Kids end up having kids, and maybe you’re a grandparent after that — whatever your goals are when you get into retirement, you don’t think about how much money you’re going to need. You’re not going to be working, and you’re not going to be able to work. Maybe you’re not going to have the mental faculties to do that, or maybe you’re not going to have the physical stamina to do the work that you do right now.
That was a big deal for my dad to have that time every single month. It doesn’t have to be a long, long time; it’s just dedicating a couple hours and just going, “You know what? This is what successful people do.”
I’ll never forget learning this line when I was in my 20s:
Successful people do the things that unsuccessful people are not willing to do.
I thought that was a great line. I was like, “Wow, that’s profound.”
People that are successful will do stuff that is not pleasant. They’ll delay gratification. They’ll take the things that they want to do and go, “You know what? I’m going to do that later. That’s going to be my reward for doing the thing that I need to do right now.”
So they reverse the order of things, because what ends up happening is their whole day is drudgery, because they’re doing all the fun stuff right now. Then later on they’re going, “Oh, man, I know this is going to be coming down the road. I got to do this. Oh, I’m going to hate doing this. I don’t want to do this.”
You’re reversing that order, where you are saying, “No, what I’m going to do is I’m going to sit down and do the stuff that I’ve got to do right now, get it out of the way, then it’s not going to be on my mind the rest of the day. Then I’m not going to be sitting there dreading that I’ve got to do this later on.”
The whole time I’m doing something that is supposed to be fun, I’m dreading what’s coming.
So delaying gratification is a big deal.
My son and I were talking about this, and he was reading this book called Atomic Habits. It was talking about how when you want to do something, you’ve got to do something.
He said, “Put it on a schedule, literally write down what day you are going to do it and what time you are going to do it. Have it on the schedule.”
I do this all the time, where I have my schedule, and I’ll schedule something and then I’ll say, “Okay, one week maybe.” If it’s a really big thing, one week before this thing that I’ve got to do, I’m going to have a reminder. Then I’m going to have another reminder a day before, then I’m going to have another reminder an hour before, and if it’s not huge, I’ll have a reminder a day before, and then an hour before.
So I’ll have these little reminders, and that way it’s just in there, I know it’s coming, and I know what I’ve got to do, and then I don’t forget about it.
To-do lists, that’s another thing I’m big on. I’ll have a to-do list of things that I’m going to do. It’s so easy today with a phone to have a to-do list, and then it’s kind of fun when you check it off and it just disappears. That’s what I love about the to-do lists on the phone; it just disappears, and it’s like this gratification of watching one thing on the list just go away.
But that is part of what it takes to really get things going well in your life. Have those disciplines.
The reality of it is that discipline — a lot of people just don’t have it, and then they wonder why they’re just anxious all the time, and the anxiety is just generalized, “In the back of my mind, I know I’ve got things I need to be doing, and I don’t know if I’m going to remember everything.”
I always tell people that the dullest ink is better than the sharpest memory.
You write stuff down, and you get it down.
Then you may go, “Well, okay, I’m having a hard time motivating myself.” Then maybe you take the next step and say, “Okay, so what is it I’ve got to do?” Then say, “Okay, now what is the benefit of doing this? What is the reward of doing this?”
In writing that down, and putting it down so that when you think about that thing that you’ve got to do, you don’t just think about the thing, but you think about what it’s going to lead to, and all the good things that it’s going to lead to.
I’m not telling you anything new, but a lot of our issues with feelings of self-worth and so on and so forth have come down to a lot of negative self-talk. “Well, I always forget stuff. I’m never going to be able to do that.”
It Takes Confidence
You walk by a mirror and you go, “I’m too fat. I am not tall enough,” or whatever. “Oh, if there’s some way I could go in and increase my height by three inches, and drop 30 pounds in 10 days,” or get a new parental relationship or something like that.
There’s not a lot that you can do, but what you can do is go, “No, wait a minute. Let me just change my focus to the things that are going on right. What are the things that are okay?” Then what happens is all of a sudden your whole state of mind changes.
There was a study done where they said to some people, “Okay, what I want you to do is I want you to stand up straight, and I want you to push your chest forward a little bit, and I want you to put your arms on your hips,” kind of do a superman pose, so to speak.
What they did is they measured testosterone levels. They found it was like a 20 to 21% increase in testosterone, and a decrease in cortisol. It was about the same amount of decrease in cortisol, like 20%, and in essence, cortisol is your stress hormone.
People don’t recognize that your body language and how you hold yourself matters.
I remember hearing this one guy go, “Hey, I want you to describe a depressed person.” He’s doing this to a whole panel of people, and he says, “I want you to describe a depressed person,”
The panel goes, “Okay, well, he’s behind the curtain over there.”
He says, “So what does he look like?”
Everybody pretty much at the same time says, “hunched over.” So it’s body language. He’s in the back and he’s hunched over.
“What about the head position?”
“Oh, it’s down.”
“Oh, okay. What about the breathing? Is it shallow? Is it deep?”
“Oh, it’s shallow breathing.”
“Oh. Wow. Okay. What about the look on the face?”
Literally going down the line, and he says, “Wow, it’s amazing. You didn’t even see this depressed person, you knew exactly what they looked like.”
That’s it; it’s our body language.
You may wonder why I am even talking about confidence. Well, confidence is one of those things that I need to actually do some of the things I’m talking about here. If I think that there’s no point in doing anything, then I won’t do anything. If I think that everything is just going to end badly and I have no confidence, there’s just no point in even trying, and I won’t even try. I won’t even do anything.
So partly, the reason we do some of these things is because you have this cognitive behavioral triangle. It’s made of our thoughts, our feelings, and our actions. Those three things, thoughts, feelings, and actions.
I often think that, for me to take an action, I have got to feel like doing it. No, that’s not true, actually. You can change your actions, and you can change your feelings. It can go the other direction, so hence that’s it.
What this has to do with finance is everything, because I will not do the things that I need to do in order to change my financial situation unless I think I can affect it in some way. Does this make sense? If I think that it is just pointless to do anything, then I will not take any action whatsoever.
Examine the Little Things
So when we get back to budgeting and things like that, what we do is we look at different areas.
We look at how much is my mortgage payment or my rent payment in comparison to my income. Typically, I want to keep that down no higher than the 20% range, and sometimes 30%, is livable. You can pull that off.
But then you look at it and go, “Oh, how often do I go out to eat?” My wife and I never went out to eat when we were younger dating because we just couldn’t afford it.
She and I were talking about this the other day. It was “splurging: to have a pizza, otherwise we got these — it was probably not great from a health standpoint, but we were young and bulletproof — little pizzas from Kroger, and they were cheap. I mean really, really thin and cheap, but that’s what we subsisted on is that kind of stuff.
It was whatever, and sometimes you can get healthy on the cheap, but it was whatever we could do to cut costs. She was an avid coupon cutter. It wasn’t bought unless she had a coupon for it, and they had double and triple coupon days, and things like that. I don’t even know if they still do that. We didn’t go out to movies.
My son and I were talking about things that you can do, and I said, “Well, gosh, I used to do things that were really creative,” because he wanted to do something special. You want to do something special for your girlfriend, or your spouse, or boyfriend if it’s a lady listening. I’m just thinking in terms of my son and I having this conversation.
What happened was that we would go and couldn’t afford a concert, so we would rent a video of a concert that we wanted to see, and I would show that video of the concert in our home. It wasn’t even TV because we didn’t have a TV that was big enough. The TV was too small; it would’ve been pretty dull.
So I actually took a projector, because I had to have a projector to do workshops in the early days, and I took that projector and I projected what was on my computer on the wall, and I ran it through a stereo so it had good sound, and that was it.
Do the Things You Love that Are Free
Literally having TV dinners and having candles — just setting up something nice like that. It didn’t cost anything to go to a park and do something. Just finding places that didn’t cost anything.
A lot of times we spend money doing things, and really what we’re trying to do is we’re trying to mix with other people. I just want to see other people, that’s why I go to a restaurant. Maybe you might really like the food, but the thing is, if you really like the food, it’s probably too expensive.
But we would go out, and we would go someplace where there were other people, maybe it was to a church event or to an organization. I belonged to a lot of clubs. I liked joining organizations that were service organizations, simply because it was a great way to meet people, but it was also just a great way to just mix with people, and it didn’t cost anything. It was good for business too.
That was a big way to do things and get my needs met in terms of connection, getting contacts with people, and just having fellowship with people, but it didn’t cost anything. So think in terms of that as much as you possibly can.
I’ll never forget talking to somebody and I said,
“What do you love that doesn’t cost anything?”
“I just love looking at birds,” and she’s going on and on talking about looking at birds, and looking at nature, and so on and so forth.
I said, “Well, how might that rearrange your spending?” She started talking about buying a really high-end bird feeder, I go, “No, no, no, you missed the whole point. This wasn’t an idea of what you could buy to watch birds because bird watching is supposed to be free.” So much for that conversation, right?
So that is part of how you get your finances in check, and you think about those types of things, think about how you can do that.
I do two things at once. I’m big on doing two things at once. I paid down debt, and I built up an emergency stash, because I found when I was working on two things at once, I was more disciplined.
I had, against my grandfather’s wishes, a car loan.
My grandfather was like, “Paul, don’t do this. Please, don’t do this.” Guess what? You have to rebel. I went and did it. I went and bought a car, and I bought it on credit, and I don’t even remember what the interest rate was. It was probably 6 or 7%, which is goofy, but I did. I did, and it took me years.
But when I paid that thing off, I must’ve been 26 or 27 years old when I finally paid it off, and I’ve just vowed never again.
My brain was fully developed. Scientists will tell you, guys, your brains aren’t fully developed till you’re 257; for ladies it is 25.
I said, “That is it. I will never do this again.” I never bought a car on credit ever again, even 0%. It was something I wouldn’t even do at 0% financing or anything like that. I was not going to do it.
Now, we did a couple things where you had to finance it, and you got a discount if you financed it. There were a couple of those things, but we paid it off in two months because it was just a way to get that discount that they were offering. But other than that, forget it. No, we didn’t do any of that.
So for that part of things, you pay off debt and build up the savings at the same time, then you might also have some kind of a match at work with a 401k, a 403(b), a 457 plan, or some kind of a qualified retirement plan at work (it’s hard to give up free money if they’re going to match).
They might have a 100% match up to 3%, or a 100% match to 3% and 50% in the next 2%, or a 100% match up to 4%. That is hard for me to say, “Hey, don’t do that, put money into savings.”
Because I’ve heard people say that before: “Make sure you build up your savings, and make sure you pay down debt before you put anything in your 401k,” and I’m going, “No, it’s free money.”
People move jobs too fast, and you get to take that money with you if it’s what’s called a “safe harbor plan,” which most retirement plans are, and that means you don’t have to wait for vesting.
So those are just a couple of things.
Thinking about discipline, pay yourself first.
You pay your bills, you pay your auto insurance, you pay your phone bill. If you have cable, it may be one of those things that you don’t need because a lot of your entertainment is right on YouTube now, and you can go on there all the time and get all kinds of entertainment.
So you pay yourself first, because you’re used to paying everybody else. Pay you, and then start to pay everybody else, and then when you reverse that order, psychologically there’s something to that. So that’s just one of the basics that I thought I would share in this hour.
So we talked a little bit about getting the finances in order as far as not spending more than you make; that’s probably a really good idea.
There’s only two things that you can do, as is often said: You can either increase income or decrease expenses. And the reality of it is that sometimes increasing income isn’t so easy.
Decreasing expenses seems to be the one that’s left to you. And it’s hard, especially when things are getting more expensive. You might have to go backward in lifestyle in some instances. There’s some places around the country — and Nashville is one of them — where the cost of living has been going up. And you go, “Well, what do I do?”
A lot of times people will do what’s called substitution. And they go, “Well, we used to do the name brand on this, and we can’t afford the name brand anymore. We need to do something else.”
We have different things that are going up in cost, and you have no control over it, like homeowner’s insurance. So what do you do?
Well, you might have to increase your deductible. I don’t want to decrease the coverage amounts in most cases, because you might be under-covered as it is already. And I say “in most cases” because you might have a situation where you have more coverage or more on your house than it would cost to rebuild it. Probably not, but it could happen.
And so those are things that you can think of as far as “How can I cut the budget in that particular area?”
A friend of mine decided to sell his house, and there were certain things that he wanted, but he just had to move out to further out into the sticks in order to afford the same kind of house that he wanted and some of the things that he wanted. But it was just ridiculous. He couldn’t live as close to town as he wanted to anymore.
And he just had to decide, “Well, I’m going to have to drive a little bit further.”
You just weigh your alternatives, and it’s really kind of a gut-wrenching thing.
But you’re thinking in terms of “What’s really, really important to me.” Prioritizing, sitting down with a piece of paper and going, “What is super important to me? What is negotiable, and what’s optional for me? What’s optional for my family?”
Looking at each budget item is really important because there are certain things that you’ll start to see that you’re spending money on. You don’t even think about it. Money can just flow out the door and you don’t even necessarily think about it so much. That’s the big thing that I find with people.
The Grass Is Always Greener
A conversation I had this week as a matter of fact: It was just comparisons. “Our friends are doing so much better.”
I was actually reading this thing and it was on kids. This was written about kids. And it was just talking about the generation coming up right now and how challenging it is, because their entire life is online.
A lot of people that have been dealing with social media. You go back 20, 30 years, and talk about when you were a kid and you go, “Well, you can try out different things.” You can try out different styles and who you’re going to be. Decide “Does this fit me? Does this fit me? Does this fit me? Does doing this or dressing this way fit me? Does doing this hobby or whatever?”
Well, now what happens is a kid tries out something and it is immortalized on social media.
It’s there forever, with no ability to go and turn back on it. And what that’s causing is people get picked on, and they get torn apart for the choices that they make.
But here’s the thing: They’re getting compared constantly to other kids. They’re constantly comparing themselves, wondering “Am I doing as well as this person? Am I doing as well as that person?”
Well, you know what, that’s not just kids. That’s adults too. And it’s, “Am I successful? Do I live up to what my friends are doing?”
This is really why I say it’s so important to sit down and decide what’s really important to you. What is a real good purpose statement you could say about yourself? What drives you? What is the thing? Think about the things, the goals that you have, the things that you want to do.
Why do you want to do those things? Why is that important to you? Start to get really, really specific about what drives your motivations, what drives who you are, and you’re going to find normally that it has nothing to do with having the biggest house on the block. It has nothing to do with having the nicest car, going out to restaurants, having a big social life, having the nicest clothing, and all of that stuff.
Usually it’s just connection.
I want people to think that I’m okay. I want people to think that I’m successful.
I’ve always loved Sam Walton’s book, the founder of Walmart, where he’s sitting in that old beat up pickup truck, and he’s totally fine in this really, really old pickup truck. And I thought, You know what? That’s what I want to do is make sure that I’m driving a vehicle that appears in such a way that nobody knows what you make. Nobody has a clue.
When you’re out and about and wearing clothes, I’m not worried about looking like I’m financially successful.
I’m just going to be who I am.
Sam Walton drove a pickup truck, because wealthy people tend to drive pickup trucks. Nobody knows what you make. That was the beauty of that.
So that’s really important. It’s not necessarily about getting into competition with other people. You know what? There’s always going to be somebody smarter. They’re going to be better looking, and they’re going to be thinner than you.
So I’m going through some of these basics. I spent a little bit of time on budgets, and you can go back on the website, paulwinkler.com, to read more or listen. Go to the podcast, subscribe to the podcast, and we got a lot of this type of material on there.
I like taking some of this stuff, some of the basics, and going back and looking at how we operate as humans, recognizing that we have a tendency to try to compete with each other.
The funny thing about people is that if you are always looking good compared to everybody else, you become fake. Nobody trusts the person that’s perfect. It’s like the story of Superman, right?
Superman, in the early days before he became really popular, was bulletproof. He could beat up everybody, he could fly, he could outrun trains, he could jump over buildings, and he could take bullets. Nothing could get to him.
And what happened is everybody got bored. It was boring. It didn’t feel real.
So you had to have kryptonite, you had to have Lex Luthor, and you had to have some kind of something that could get to him and take him down. You had to have some kind of weakness.
That’s the reality of people: We like it when somebody is real and genuine. But so often it’s hard for people to be genuine because they don’t feel tremendously great about themselves for whatever reason. And so often we just want to live up to a standard, and we want to be thought of as good people.
Let’s just hit your Christian standpoint. I gotta somehow earn salvation or something. As much as we know that it’s not what we’re supposed to do, we still do it.
We’re trying to impress a lot of other people that we don’t like with money that we don’t have.
So what happens is that we’re trying to live up to the standard, and living up to a standard costs money. And that’s one of the problems that we run into.
Target Date Funds
Next thing that we run into is this: When we’ve gotten this nipped in the bud, so to speak, and we’ve gotten this figured out, then it comes to investing, and we start to look at where we invest in our 401Ks.
I saw this statistic — I was teaching a workshop on this — and I saw a statistic. It’s like two thirds of people are putting all their money in target date funds. And you may be a listener to this show and go, “Oh, Paul, talking about target date funds again.” I have to. Two thirds of people are investing in this.
The thing that you’ve heard me talk about over and over again is the level of diversification, and I walk through this in great detail in this workshop on indexing. It is eye-opening when you look at how these portfolios are put together, and the index funds, how they’re put together — the hidden expenses in the index funds.
People would have no clue. I’m like, “Tell your friends.”
I see these things on YouTube. “The only three mutual funds you’ll ever need …” or something like that, only two or three mutual funds. It’s this young kid telling you there are only three mutual funds, and they’re typically total market funds. And if this kid really knew how poorly diversified those portfolios were, he wouldn’t be putting videos out, and certainly he wouldn’t have millions and millions of views on those videos.
I mean, people are eating this junk up, and they don’t know what’s going on. But it’s really simple. “Oh, only three things I got to know. I can do that.” And then they jump in and they watch the video and go, “Oh yeah, that sounds really great. Okay, I can solve that part of my life and then move on.”
Well, it’s not quite that simple. And the reason I teach about this is because if you understand why things work the way they work, then all of a sudden you’re a lot more confident in your investing strategy.
Back 20 to 25 years ago, the whole thing out there was this idea of stock picking, trying to figure out which companies to choose. “I really like this company. They’re coming up with a product. I like the product that they’ve got and I’m really a big fan of it, so I’m going to buy their stock.”
Well, when I buy their stock, I’m assuming that it’s going to take off in value. Well, why would it take off a lot? Why would it go up a lot? Well, number one is that company’s just dying to pay you a lot of money to use your money, right? Nah, probably not.
The other reason is it must be mispriced. “It’s such a great product and not everybody knows about it, but I know about it, and I’m going to buy it at the price that it is now. And then when it takes off, I’m going to be the benefactor of that.” In other words, it’s mispriced. It’s selling for less than what it’s really worth.
Now, when I buy that company, I am buying it from somebody that owns it right now. Do you think the person that owns that stock right now knows something about the company? Yeah. Do you know more than they do? Probably not. Maybe, maybe not, but in the sum total, most trading is done by big institutional traders, and they study the companies pretty doggone well.
You’re buying that from somebody that knows an awful lot about the company.
So your likelihood of getting something that’s totally mispriced isn’t great.
So buying individual companies, that got knocked out of the water when John Stossel used to throw darts at the stock tables, and he would beat the professionals on a routine basis.
He’d be throwing darts and he’d be talking to Burton Malkiel, the Princeton professor, and he’d say, “Why am I beating the professionals, routinely beating the professionals, and not by just a little bit but by a lot?”
Burton Malkiel goes, “They like to believe that what they’re engaging in is really helpful, but the evidence is that it’s not.” That’s a paraphrase of what he said. And he says that what happens is they try to engage in trying to pick which companies are going to be better than others, but sum total, one fund manager is buying a stock from another fund manager that’s selling it. One of you is going to be wrong, is the way I like to put it.
So that was my eye opening to how engaging in that doesn’t make a whole heck of a lot of sense.
Tactical Asset Allocation
Then it was like, “Well, what we can do is tactical asset allocation.” There are areas of the market that are going to benefit more from what’s going on economically, and we can shift money between large companies versus small companies, and large companies versus large value, or large U.S. versus small U.S. Or we can shift money between different areas of the market based on what’s happening.
Well, that’s really an extension of the first thing, because if you think about it, now we’re saying that not just an individual stock is mispriced, but the entire market is mispriced, that the whole thing is selling for a different price than what it’s really worth.
It’s really the height of ego to think that you know better than the rest of the market.
So the idea, when I look at these companies and I’m trying to move and I’m trying to sell out, is really thinking there’s a mispricing.
But it gets even worse than that, because usually, if you look at actual trading data and you look at what people are really doing, it’s usually not that they’re going, “You know what? Based on what the president’s doing right now, this size company is probably going to do better than this size company, or this type of value company is going to do better than this type of growth company.” It’s not even that. It’s usually, “You know, George, you’re seeing that large U.S. stock, that thing is really killing it. Those large U.S. growth companies are really, really doing well right now. I think you ought to be investing in some of those.”
It’s usually that. “What did well yesterday? Let’s invest more money in that.” Then you go and you stick all your money in that area of the market and then all of a sudden it drops.
Well, like in 2000, tech stocks dropped 80%, and then it’s like, “Oh, maybe that wasn’t the best idea.” And then you move to the next thing you think is going to do well. “Well, maybe let’s invest in real estate.” And that’s what happened. Literally.
I mean, when growth stocks did really, really poorly, people weren’t looking at International Small Value, which ended up doing the best in that next decade. They weren’t looking at that. They were looking at real estate or something that they were familiar with.
That’s the other thing we tend to do as investors. We tend to look around us and ask, “What am I familiar with?” And that’s what makes it so hard to stay disciplined, because I’m constantly looking at market segments or companies to invest in, and, “They are choosing me.”
As one of my friends likes to put it, “I’m not choosing them.” You ask somebody to name a fund company, for example, and you’ll name a fund company, and guess what? It’ll be a fund company that probably does a ton of advertising. Did you choose them? No, they chose you. They did a lot of marketing to you so that they were top-of-mind for you when it came to naming a fund company, or naming a benchmark.
So tell me what the market did today, and somebody’s going to say, “The Dow. Well, Dow did this. The S&P did that.”
“Well, what’d the Nikkei do?”
“I have no clue. I’ve never seen any data on the Nikkei.”
“Well, what did the Europe, Australia, Far East small cap value index do?”
“I don’t know.”
With the FTSC, “What did the international market do in that particular asset class?”
“Well, I don’t know. I didn’t even know that there was an FTSC.”
So what happens is you’re thinking you’re choosing, but you’re not. It’s choosing you because of marketing. So you think about it, it’s kind of like music.
The Hitman, there was a really good book. It was about the music industry. Those of you who are into music know what I’m talking about. Why did songs become hit songs? Because the DJs were paid to play them. You probably missed a ton of really good material in the 1970s and didn’t know it, because what happened is there were certain songs that were pushed upon you, and you didn’t hear the alternatives.
So hence you have all these great memories of certain things. It’s the same thing. I mean, it’s just that familiarity bias is a cognitive bias and we don’t recognize that it’s happening to us.
So when we invest, I say now we look at large companies and small companies. And when we look at indexing of a portfolio, that is something we often do to say, “Okay, let’s not stock pick, and let’s not market time, let’s index.” But what’s happening more and more with index funds is we’re seeing that the indexes are being traded actively in portfolios.
So that’s why I tell people, “Pull out a statement.” Look at an investment statement of yours from three or four years ago, and look at it today, and look at how it differs. If you see big differences in it, and in the asset category holdings, then you can pretty much know that there might be some tactical asset allocation going on. Unless it’s slight; you might have slight changes based on if you’re getting a little bit older, so you’re going to back off on stocks and you’re going to increase bond holdings. But look at that.
You’ll find that funds get moved around and they get changed. They get dropped. Commodities funds get put into portfolios, you’ll see that. And I say, “No, we don’t want to invest in commodities.”
Real estate investment trusts, they get put into portfolios, and I can say, “No, I don’t want any real estate investment trusts in my portfolio.”
So look at those types of things. Look at how things are being moved around, because a lot of times what people do is they give discretion over to the investment manager. In other words, they say, “Here, handle this for me. You have my permission to do all the trades that you think are necessary.”
They’re blindly trusting the advisor. They don’t know what the advisor’s doing, they don’t have a clue, and they haven’t ever read the ADV. Matter of fact, I’ll talk about that in a second. They haven’t read those disclosures, and they don’t know what the fund company can do.
Active vs. Passive Approach
So we’ve been talking a little bit about investing. Once you start investing, where are some of the mistakes? Active versus a more passive approach. And when I say passive, I don’t mean just totally passive. There is some management of the portfolio, making sure re-optimizing of the portfolio, making sure the asset classes and the funds stay true to the asset class. And I did a whole workshop on that that you can check out. If you go look at our podcasts or the webinars, on my website, paulwinkler.com, you can see a whole workshop that gets into the real details of that.
But in general, when a portfolio is managed, there’s this really, really far extreme position that you stock pick, you market time, you try to figure out where things are going, you move money around based on that. And then you have this other side that says, “Just put it all in an index fund.”
Then what ends up happening is the portfolio ends up being super overweighted in large companies. And then you have tracking issues that you end up with. And there are a lot of problems that you can run into with that and a lot of hidden expenses that people aren’t even aware of. So, that’s something that I often tell people. Make sure you’re conscious of this. Don’t ignore this kind of stuff.
But it’s like everything else in life.
The truth’s somewhere in the middle.
There is some management which you don’t engage in, trying to figure out which stocks are going to do better than others.
Let’s sayI’ve got two companies that are small value companies. Maybe they’re a billion dollars in size, and then their price is low compared to their book value, and so we would say it’s value. Historically, about 95 or 96% of the time value companies outperform growth companies over 20-year periods. Small companies outperform large. So, what we do is about 85% of the time we want to own both of these things.
Well, what do we look for? Look out for turnover ratios. Look at their prospectus. Look, if they talk about them, they’re going to engage in trying to figure out which areas they’re going to do better than others.
You see that type of language. You see tactical asset allocation. In ADV you can see whether somebody actually believes that they can do the stock thinking and market timing based on how the wording is. The verbiage, read it. It’s a disclosure that’s meant for you to be able to understand. Don’t ignore it.
That’s how a registered investment advisor actually has to disclose things to you, in an ADV.
This is “The Investor Coaching Show.”
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.