Making Good Use Your Time

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Over the weekend, I read an article discussing the Retirement Planning Pyramid. This was originally created by The Journal of Retirement Planning and then updated by Tony Isola of Ritholtz Wealth Management. All credit goes to Tony for bringing this content front and center and Josh Brown for getting it updated.

The concept of the article was to deconstruct the original food pyramid and rebuild it using personal finance best practices. Where should you be spending your time and what you should avoid? Let’s dive into each section of the pyramid.


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At the top of the pyramid, we find all the stuff you should not be wasting anytime on. Everything from jumping in/out of investments to sleazy salespeople that will ruin your portfolio. These are the areas of your investing career you have to stay away from.

Market Timing

Quit trying to guess when the next market correction will be and instead work on a consistent and repetitive investment process. Too many people horde cash trying to wait for a dip but it might be years until one actually occurs.

Permanently Losing Capital

 A well-diversified portfolio will recover from a fall in value during a recession. However, a fictional business model that investors price off their hopes and dreams on, is not an investment but rather a gamble. Buy good businesses!

Financial Salespeople

This might be the most important thing to focus on. In my day to day job, I get to see a number of financial advisors and salespeople. Some advisors do extensive planning work and are passionate about their work. Others are salespeople who work day/night to fit the best commissionable product in your pocket. Spend time learning about what makes a good financial advisor.

Politics & Investing

This should be a no-brainer but probably more than half of investment decisions seem to be made around politics. Leading up to the last election, the outcome was on every investor’s mind. I would emphasize focusing on the management of a business. A solid CEO and management team can create insane amounts of wealth, regardless of whos in office. I would highly recommend William Thorndike’s “The Outsiders” to learn about some of the best CEO’s of our time.


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The next layer of the pyramid is stuff we should try to reduce completely from our personal finances. Think of this like sugar, it’s fine in a diet just in moderation.

Checking Account Balances Frequently

This should be obvious to all but I will make one exception. When it comes to investing, time is key. The longer you can allow compound interest to work, the more wealth you will accumulate. Looking at your investments frequently creates a habit of focusing on the short-term volatile periods. However, checking and savings accounts should be checked regularly. To best ensure your cash flows are positive and you have room to save, I would advocate a weekly or monthly review of all cash accounts.

Watching Financial Media

The financial media sells news, not advice. Try not to get this confused. Whether its CNBC, Fox Business, or some online media network, the goal of each station is to create action. The action is not intended to make change your investments but instead, take advantage of some advertisement. The downside to financial media is all the large investment firms run ads, making you feel you need to take action with some financial product. I would highly recommend checking out the last image on my Information Overload post.

Worrying About Your Finances

Stress kills, literally. So why let your finances become another area of stress in your life? With some simple saving and spending strategies, it is very easy to make your finances stressless. Along with this, should be a stressless investment strategy. If you have to stay up at night thinking about your investments, you’re in the wrong strategy.


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Now we get to the good stuff. Here is where we want to be spending our time to improve the outcomes for our investments.

Increasing Your Savings Rate

Many investors think the best way to improve their retirement projections is to focus on taking more risk and aiming at higher returns. In reality, increasing your ability to save will vastly improve any retirement plan than trying to increase your returns. Focus on consistently increasing your savings for best results.

Dollar Cost Average

This goes back to not focusing on your accounts every day. One of the best features of a 401k is the fact that you contribute biweekly. Being able to buy into your investments regularly greatly improves our ability to compound our wealth.

Avoid Taxes & Expenses

Another common sense step is to keep an eye on your cost. As the cost to own mutual funds and ETFs have plummeted, so should your portfolio cost. Be smart to also make use of tax-efficient investment vehicles, like IRA and Roth IRAs.

Diversify

Don’t put all your eggs in one basket. If you can reduce the number of potholes you step in during your investing career, you reduce the possibility of blowing up your future. Everyone wishes they owned Amazon since IPO but to do so required multiple 50%+ drops. Would you have the mental fortitude to hold through a drop like that?


This is by far the best part of this pyramid; continued self-development. Working hard to improve your future self will pave a path of success ahead.

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Invest in Yourself

With the internet, immediate access to amazing content has never been more prevalent. It’s up to us to spend our limited hours consuming the right content. Choosing a good book to further develop your career will pay more dividends than binging the next Marvel series on Netflix.

As I discussed in my last post, diet and exercise correlate very well with your personal finances. The more you can create structure in your health-based habits, the more likely these structures will rollover to other aspects of your life.

Spend as much time as you can building up the base of the pyramid, YOURSELF before you get too caught up in the rest of the minutia.

Please ignore typo’s, I will be editing grammar as I go!
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

Fitness & Finance

Excuses - Blair

What does it take to improve your health, wellness, and overall physique? The answer is to have a consistent exercise program and eat well. Diet and exercise, when used collectively, provide the greatest chance for you to see results. So what then will improve your financial health, wellness, and portfolio physique? Let’s discuss!


I’m going to reference a lot from The Power of Habit, which has an excellent chapter on Starbucks and their use of willpower in educational programs.

In the book, researchers at Case Western Reserve University tested the willpower of students by having them sit at a desk between two bowls. One bowl contained freshly baked cookies, while the other contained radishes. The test was to see if they forced one group to eat only cookies and the other group to eat only radishes, who would perform better at completing various puzzles.

Which group would you rather be?

What happened after the study (not shocking) was that the kids who ate cookies were relaxed, took their time to work on the puzzles, and seemed to be happy. While the kids forced to eat radishes were upset, frustrated, and stressed out.

By making people use a bit of their willpower to ignore cookies, we had put them into a state where they were willing to quit much faster

-Duhigg


Just as it’s hard to avoid freshly baked cookies, it’s also hard holding onto your investment strategy during volatile markets. And like it’s hard to skip happy hour with your friends, it’s also hard to avoid the temptation to overspend. When we are constantly bombarded by things attacking our attention, it’s very hard to focus on making the best decisions for either our health or money.

As I write this piece, the internet is peppered with Amazon Prime Day ads, incentivizing customers to blow their entire paycheck on some new Alexa product. If you read my earlier article, Information Overload, I explained how the major technology firms attack your heart, brain, gut, and desire, and Prime Day is a perfect example.

Prime Day

Source: Amazon

Now, more than ever, the battle over consumers time and attention have never been greater. Marketing departments in every industry are working day and night to find the best way to steal your time. Finding time to stick to a workout routine or investment plan has never been more difficult.


So here are a few tips to hopefully keep you somewhat focused on the future:

FOCUS ON THE LONG GAME

You will not wake up tomorrow with six-pack abs, nor will you wake up with market-crushing investment returns. You can’t plan to win the lottery this weekend, just as you probably won’t correct a spending habit overnight.

It takes time and dedication for both your fitness and finances to see best results. Working out for only a few weeks seems useless but once your body begins to transform all the results are clear. This is exactly the same as allowing your portfolio an extended time period to grow. Extend your investment holding period out another 5+ years and watch the results.

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PLATEAU’S ARE NORMAL

Personally, plateauing in fitness is way more painful than in your finances. When you have been diligently eating and hitting the gym each morning, seeing no results or improvement can be tough. This is where your mental state comes in and your willingness to work through it is key. Understanding how to navigate through a plateau is crucial towards your physical development.

The same thing is true with investing. THE STOCK MARKET DOESN’T ALWAYS GO UP!

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Source: GIPHY

Aswath Damadorian does a great job tracking annual stock market returns. If you double back on my expectations article you will see that it is very common to see a year with flat market returns. This is the equivalent of your workout plateau. Just chill out, hold your strategy and keep your contributions going. Your focus should be on your personal finances (debt & savings) anyways so don’t worry too much about yearly market returns.

MAKE IT A LIFESTYLE

Fitness and finances are lifestyle decisions. None of anything I have written will be useful if you don’t care about applying it.

If your plan is to go through life mindlessly, expecting your future to be taken care of for you, your an idiot. There are so many issues with entitlements, savings rates, 401k participation rates, and debt loads that people really have to make lifestyle decisions to correct their finances.

E-Trade does an amazing job with their marketing campaigns and this slogan of “don’t get mad, get E-Trade.” The thought here is to stop hoping your lottery winnings arrive soon and instead start building something yourself.

first class GIF by ADWEEK

Source: Giphy

You have to make lifestyle changes for best results in any exercise program. A lot of these same changes will fall over into your personal finances as well.

In The Power of Habit, radish/cookie test was expanded into a personal finance and exercise program. These programs eventually created almost a trickle-down improvement into each other category. You start working out, you make better meal decisions and avoid cheat meals/drinks. This reduction in cheat meals, fast food, and alcohol consumption actually improved the monthly savings rates of individuals studied.

AVOID THE GET RICH/FIT QUICK SCHEMES

Every time I step onto the tee box at a golf course, I mentally picture myself piping a drive down the center of the fairway. What happens next, is almost never a drive down the center of the fairway. This is part of the reason golf is such a mental game, you have to get out of your head if you want to be any good.

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It doesn’t matter which diet you found, what investment strategy you discover, or investment vehicle you want to buy. Nothing is going to get you fit or rich quick. They all require the same two things: persistence and patience.

Millions of cognitive biases (our brain playing tricks on us) end up convincing us that we need to go ahead and do something.

  • Let’s buy a stock after its run up 1000% because ABC News did a headline on it!
  • FOX just did a survey on a new diet with excellent results!
  • Joe, my barber, is making a killing off cryptocurrencies!

Nobody ever sells the downside of these schemes which is what you need to be paying attention to!

  • 1000% stock gain has dropped over 50% on 20+ occasions
  • FOX new diet was a sample size of 4 people
  • Joe, the cryptocurrency trader, was just lying to your face
Please ignore typo’s, I will be editing grammar as I go!
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

Surviving Your Investments

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I recently finished reading Deep Survival by Laurence Gonzales. It’s an excellent book that does a great job of evaluating how people make decisions and ultimately fail or succeed in remarkably challenging situations. These chaotic events are pretty insane. For example, Gonzales recounts the decisions made by a climber while basically falling off the side of a mountain.

In the book, Gonzales does a superb job relating how our brain acts in these stressful and strenuous situations, and where our reasoning goes wrong. Most “survivors” in these stories seem to share similar characteristics that help them overcome the struggles they were facing. I figured I would outline some themes I picked up from the book and how I see this related to everyday investing.


If we think big picture for a second, how survival relates to investing is quite simple. When we face difficult times, we tend to become blind to seemingly obvious actions and make decisions that seem irrational in hindsight. Everyone knows not to drink salt water but if you are stuck at sea for a week, you probably will forget.

Behavior Gap - Forest & Trees

We begin to focus way too intently on the trees and ignore the fact we need to remember it is a part of the entire forest. As with drinking salt water, we forget about the big picture of needing to make smart survival decisions. Just as we might abandon our investment process after a few bad days.

As investors, we need to make sure our decisions are matching our future goals. We cannot let one specific day of volatility (tree) take our eye off retirement, college savings, a new home or whatever our goal (forest) is. We have to maintain our ability to step back and double check our work. Our goal should be to make sure that we can see the forest for the trees, and not lose our perspective in any particular situation.


Traditional economics assumed perfectly rational agents. So does traditional survival training. Neither assumptions reflect the messy real world.

I love this quote by Gonzales as it really emphasizes this point:

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You will never have a simple, easy investing career. Shit happens sometimes we need to take a breather and recollect our thoughts. Don’t quit or give up when things happen but instead evaluate your surroundings and make the next move.

Investors tend to anchor their thoughts around economic forecasts, market predictions, and other historical stock market events.  These are good starting points but we have to remember they are measures of what has happened in the past. To quote Mark Twain, “History doesn’t repeat itself but it often rhymes.”

It is inevitable that we are going to see something happen in the markets, like volatilitybut maybe to a greater magnitude. This doesn’t mean to scrap our entire process or change what you are doing but instead to revisit our own process. We cannot let ourselves excess over one data point and become blind to other indicators available to us.

Just as with survival, nothing ever tends to play out as it does in training class. Very often these survivors get caught improvising and making adjustments based upon the experiences laid in front of them. As technology advances, information is more easily accessed, more investors enter the market, new challenging situations will be inevitable. It’s up to us as investors to evaluate what’s going on, make smart decisions AND SURVIVE.

Seeing the trees (February 5th, 2018):

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Source: money.cnn.com

Seeing the forest (1980-2018):

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Source: http://www.macrotrends.net
Please ignore typo’s, I will be editing grammar as I go!
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

Stop Chasing Returns

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What is it about human behavior that has us all chasing the newest, shiniest investment that comes our way? Each and every year some new topic has the markets all excited and people rush out the door to figure out how they can take advantage of it. But the thing we have to try to focus on is what SHOULD we be chasing with our time, attention, and money.


Let’s look back to the theme for 2017: Bitcoin & Cryptocurrencies

Last year, people went nuts at the first sign of Bitcoin’s price skyrocketing. Without understanding what Bitcoin actually is, how cryptocurrencies work, or even what to do with a Bitcoin, billions of dollars continued to rush in.

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The price of Bitcoin climbed more than 1,000% during 2017 and led every news outlet on the planet to allocate at least a few hours discussing the topic. Immediately your plumber, barista, mechanic, and attorney were all cryptocurrency experts and you were the idiot.


So, what exactly happened?

My guess… the FOMO got a little out of control.

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Source: The Interwine Group

In the end, most global markets became volatile at the start of 2018, and so did the price of Bitcoin and other cryptocurrencies.

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If we look at the Google Trends over the past year, as soon as the market volatility picked up and the price of most cryptocurrencies plummeted, consumer interest flatlined.

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Source: Google Trends

If we run this scenario over and over again, there are dozens of other topics the average investor will chase. From international stocks to real estate, we could swap Bitcoin with any other asset class and see similar results in some prior year. We are consumed by the FOMO and seeing others make great returns, so we instinctively chase after whatever seems to be doing well.

So, thank you to Meb Faber for finally putting together this simple and elegant overview of where investors SHOULD be focusing their time.

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If you take a look at Meb’s Investing Pyramid, we see the core of any financial plan should be focusing on emergency cash and paying off your debt. If you’re making 15% annual investment returns but paying 20% credit card interest, you’re going nowhere. You need a strong foundation to build a home and with investing that starts with a strong personal balance sheet.

Investments should be one of the LAST areas an investor should be spending their time and energy. If you think you have a real edge against the millions of investment professionals and computer algorithms across the globe, you are in for a rude awakening.

Focusing on the basics of personal finance, budgeting, and simple financial planning will vastly improve the outcomes of investors instead of grabbing an extra few percentage points of returns in your 401k.

With personal finance comes personal development. Continuing your education, completing certifications, excelling at your job, improving your well being and community involvement. All of these areas will provide stronger personal and professional returns than trying to focus on your investments to make up the difference.

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Source: Visual Capitalist

Stop focusing so much on the small minute details like your annualized investment returns and instead focus on how to improve yourself and your household finances. Beating the market in 2018 will do almost nothing towards your retirement. Instead, pay off a few extra bills, advance your mortgage payments, or consider contributing more to your tax-advantaged accounts.

Please ignore typo’s, I will be editing grammar as I go!
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

Explaining Mutual Funds & ETFs

Munger - Think

Technology over the past 20 years has completely revamped almost every industry. It has created millions of jobs and at the same time eliminated millions of remedial tasks society was accustomed to. In finance, this same story holds true with how we monitor, maintain and implement investment decisions. I would say technology has dramatically improved our day to day lives but to quote Louis C.K…

Everything is awesome, and nobody is happy.


Today, it has never been easier to invest. In less than 5 minutes, you can open an investment account, fund it, and buy hundreds of stocks. In years past, it took weeks or maybe months. So before we go into these fund structures, let’s take it back a few years.

Let’s say its 1901 and you want to start investing. How would you get started?

You would have probably had to find some stockbroker and then buy some individual stock. No diversification, no online account access, and no way to verify your broker wasn’t a crook.

It wasn’t until 1924 when the first mutual fund would provide investors with an option to diversify their investments. No longer buying ownership of an individual company but now the ability to buy a basket of companies with someone to manage and monitor the underlying businesses.


To try to keep this example as easy as possible, the best way to understand these various investment “vehicles” is by thinking about them like cars (pun intended). Whether it’s a mutual fund, ETF, or any other pooled investment, most are simply the different packaging of the same underlying components.

It doesn’t matter what car you pick off the lot at Enterprise Rent-A-Car, they all come standard with tires, breaks, airbags, seats, and an engine.

Image result for type of cars

The same is true with investment vehicles but now the components change. All mutual funds and ETF’s come standard with individual stocks, individual bonds, currencies, commodities, or some other investment packed inside. The word mutual fund or ETF is synonymous with Sedan or SUV in this example.

Saying “I want to buy a mutual fund” and “I want to buy a sedan” are both identical statements. You need to then figure out whether you want to buy a Ford or Chevy just as you need to decide between Vanguard or BlackRock.


So let’s start with a quick overview of what a mutual fund actually is.

As mentioned above, a mutual fund is simply a basket of some underlying stocks, bonds, or other investments. If we think about the common S&P 500 Index, which represents 500 individual publicly traded companies in the United States, a mutual fund allows you to make one purchase and get a small exposure to all 500 companies.

Image result for sp500 index holdings

Source: FI By Design

The logistics of how mutual funds work are pretty easy:

  • First, Investors pool their money together with a fund manager
  • Next, The fund manager buys a bunch of securities
  • Then, The securities generate returns (losses)
  • And Finally, the returns (losses) are passed back to the investors

Image result for mutual fund process

Mutual funds simply allow investors to invest collectively into some asset class with the hopes of generating positive returns. This disruption in 1924 allowed investors the opportunity to have investment oversight, diversification, and a simplified solution to begin their investing career.


Now, just as mutual funds disrupted the individual stock marketplace, ETF’s have begun to disrupt the mutual fund market. With a focus of passive investing along with tax and capital gain concerns, the first ETF began traded in 1993.

So what exactly is an ETF? Let’s ask Vanguard:

What is an ETF

Source: Vanguard

To summarize, an ETF is simply a fund made up of individual securities that trade on a stock exchange.

ETF’s do the exact same thing as a mutual fund when it comes to diversifying your holdings, however, the method of buying and selling differs to a degree. Mutual funds are redeemed directly from the fund company, where the stock market bids the price of ETF’s up and down based on investor sentiment.

There are some structural differences to the ETF’s that improve the tax efficiency but simply understanding they are funds at the end of the day is sufficient for the average investor.

BlackRock, one of the largest ETF providers, put a solid overview of mutual funds, ETF’s and stocks in the table below:

etf-mutual-fund-comparison-chart

Source: BlackRock

So as investors, what are we to take away from all of this?

The quick answer is that as technology keeps advancing, we have to expect the way we invest to change. As new, easier, and more cost-effective ways to invest come about, new products will emerge shortly after.

I think looking at this entire marketplace like a car dealership will really help clarify a few things and help create a visual for newer investors.


Think of any investment company like a car manufacturer. Vanguard being Ford in this example. 

Vanguard offers a ton of investment vehicles on their lot that you can review, analyze and eventually drive. Not every car is right for every driver, just as not every ETF or mutual fund is right for every investor portfolio. Know what you’re in the market for before aimlessly wandering down the lot.

Also, just as your local family can open a self-named Ford dealership, individual advisors can self-name their own practice and sell Vanguard funds to their clients.

Image result for car lot


Steer clear of the used car salesman!

If you simply google car salesman, the photos that pop up are hilarious. The scary thing is that the financial industry is riddled with these salesman trying to pitch whatever mutual fund or other investment product they can make a quick buck on. As product costs have dropped so dramatically over the past decades, so has the need to pay someone a fat commission to buy a mutual fund.

If your working with an investment company, stop to evaluate how you are invested. Are you in mutual funds or ETF’s? Are there any commissions? Do you pay a management fee? All easy questions that need to get answered.

Image result for car salesman


Don’t get too hung up on one manufacturer

Our goal is not to get stuck too much in the Ford vs Chevy conversation but instead on the concept of transportation altogether. We drive a vehicle to get us from point A to point B, just as we buy a mutual fund to grow our wealth from A to B. Ford is not driving your car but instead picking and organizing the components. The same is true with Vanguard and BlackRock. They are packaging you a “vehicle” of investments to hopefully drive you to retirement.

If we purchase the wrong car and have issues with the performance, the issue is on us for making the poor decision. Brand loyalty only means so much at the end of the day and as investors, we should be focusing on the best investment opportunity for our money at all times. Not the shiniest vehicle on the lot.

Please ignore typo’s, I will be editing grammar as I go!
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.